# Reading 42 Equity Q - when to multiply by 1+g

Hi, I’ve been doing the Schweser questions for reading 42 and I can’t see the pattern for when they multiply the dividend payout numerator by (1+g) and when they don’t in the equation for P/E and for P/S. Do they randomly do that?

If you’re given D0, you multiply by (1+g). If given D1, no adjustment is needed. For P/S, if you’re given (E1/S1), no adjustment is needed.

In the following question, how do I know what time period the dividend payout ration is referring to? Question: What is the justified trailing price-to-earnings (P/E) multiple of a stock that has a payout ratio of 65% if the shareholders require a return of 10% on their investment and the expected growth rate in dividends is 6%? Answer: P0/E0 = (0.65 × 1.06) / (0.10 – 0.06) = 17.225

tmishin Wrote: ------------------------------------------------------- > In the following question, how do I know what time > period the dividend payout ration is referring > to? > > Question: > What is the justified trailing price-to-earnings > (P/E) multiple of a stock that has a payout ratio > of 65% if the shareholders require a return of 10% > on their investment and the expected growth rate > in dividends is 6%? > > Answer: > > P0/E0 = (0.65 × 1.06) / (0.10 – 0.06) = 17.225 Ah, I see what you’re saying. Since they are asking for justified trailing P/E, you would multiply by (1+g). If they were looking for justified leading P/E, then you wouldn’t multiply by (1+g). Have you reviewed the formulas?

Just looked it up, and what you’re saying makes sense. Just gotta watch for the words. I guess I haven’t review the formulas enough

From what I remember, P/S is usually trailing. I think they might have explicitly said so but someone may want to confirm.

I just remember it as Justified P/S ratio as profit margin x justified trailing P/E

This is a good tip! I had this correct in my notes - but copied it down wrong onto a formula cheat sheet I created! That could have been disasterous!