For the payout ratio (1-b) is assumed to be constant. Therefore D1/E1 is equal to D0/E0. If these two equal each other that means D0/E0 is already multiplied by (1+g)/(1+g). Is this a correct way of thinking? I understand that:
E1 = E0 (1+g)
I don’t get why there is an additional (1+g) in the trailing P/E formula if the payout ratio already takes (1+g) into consideration.
Can you rephrase your question? It seems like you’ve answered your own query but perhaps I’m not on the same page.
I wrote an article on this that may be of some help: http://financialexamhelp123.com/justified-ratios-price-multiples/.
Your formulation of the trailing P/E ratio appears to be incorrect: it’s E1/P0, not E0/P0.
How do you attach images? I am trying to post a derivation
Thanks S2000. The derivation of the formula for trailing P/E ratio helped. I just don’t get why
This is from reading 33 page 249: example 11
trailing EPS = $1.81 current dividends = $0.58 dividend g = 3.5% r = 6%
It says (1-b) = D0/E0, which is 0.58/1.81 = 0.32. From then on, it’s just plugging into the formula.
If (1-b) = D1/E1 = D0/E0, that means growth applies to both the dividend and the earnings. If that is the case, then why is there another (1+g) for the trailing P/E?
Can anyone solve the above problem using:
Leading: P0/E1 = (D1/E1)/(r-g)
Trailing: P0/E0 = {[D0(1+g)]/E0}/(r-g)
How do I get E1 from E0? 1.81 x 1.035?
Maybe this way, it will help me visualize the problem better.
Because trailing P/E is P0/E0, whereas leading P/E is P0/E1. To get from leading P/E to trailing P/E, only the denominator changes, by a factor of (1 + g).