Module 29.2 LOS 29.f: Justified Leading and Trailing P/E

Justified P/Es are based on firm fundamentals. The leading P/E uses earnings forecasts from the next period while the trailing P/E uses earnings from the previous period. Below we see how we can use the DDM to calculate these ratios.

where:-

P₀ = fundamental value

D₀ = dividends just paid

D₁ = dividends expected to be received in one year

E₀ = current earnings

E₁ = earnings expected in one year

b = retention ratio

(1 − b) = dividend payout ratio

g = dividend growth rate

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