implied P/E

[jerrycolumbus]

Schweser Book 4 P.379
Why are implied P/E and the index growth rate negatively related?
How to compute implied P/E?

 

[florinpop]

implied p/e is the value that a company should have based on its ‘fundamentals’
you have two calculations for pe based on trailing or leading earnings
p0/e1=(1-b)/r-g
p0/e0=(1-b)*(1+g)/r-g
as you can see the higher the growth rate the higher the p/e
But when comparing to the industry if the industry has a higher growth rate than the company that means that the company’s p/e needs to be less than that of the index. basically the index incorporates more growth in its P/E

 

[jerrycolumbus]

Thanks for the answer.