Industrial Light is expected to have earnings per share (EPS) of $5.00 per share in five years, a dividend per share of $2.50, a cost of equity of 12%, and a long-term expected growth rate of 5%. What is the terminal trailing price-to-earnings (P/E) ratio in five years? A) 7.14. B) 3.75. C) 7.50. D) 15.00.
is it D?
no - C. (1-b)(1+g) / r-g (.50)(1.05) / .07 = 7.5
C (D1/E0)/(.12-.05) = (2.625/5)/.07=7.5
Price is Do(1+G) / (k-g) or 2.5(1.05)/(0.12-0.05) = 37.5 Divided by Earnings of 5 this is: C: 7.5
Look at all those formulas! We must all make a pact to get lives post 07/June
ok isn’t the trailing P/E = (1+b)/(r-g)? Why do we multiply it with (1+g), that makes it leading P/E, doesn’t it???
^ that is LEADING p/e its not intuitive to me. its actually how i remember it. do the opposite than you think actually LEADING p/e is (1-b)/(r-g)… not (1+b)
your lives will be much easier if you just remember the basic formula: P= D1/(k-g) D1= dividend next period, or D0*(1+g) all other price multiples can be derived from that ie P/B, P/S, P/E etc… trailing or leading P/E just refers to whether you use E0 or E1.