On page 72, Why are we using a retention ratio of 1.50/3.00 which is using the CURRENT dividend/earnings when figuring out LEADING justified p/e?
It is clear on page 71 that the formula for LEADING P/E uses D1/E1 to get 1-b.
To use the justified leading (or trailing) P/E formula, growth rate has to be constant. In such a case, D0/E0 = D1/E1.
Sorry, I still don’t get it. If the growth rate in dividends is constant (3.5%), the growth rate in earnings is not known so we don’t know if the payout ratio is the same (i.e. D1/E1 = D0/E0). I’m probably missing something obvious here.
If the growth rate in dividends is constant, the growth rate in earnings has to be constant (and same).
gotcha, that’s an assumption I will make and makes sense for this test. thanks CMLSML!