Justified Trailing PE vs Justified forward PE.

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bloodline

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Justified Trailing PE = 1-b(1+g)/r-g
Justified Forward PE = 1-b/r-g
I am struggling to understand why we assume that the retention ratio for the Justified trailing PE ratio will grow at g, but we do not make the same assumption for the Justified forward PE ratio, can someone explain why?
 
bloodline wrote:Justified Trailing PE = 1-b(1+g)/r-g
Justified Forward PE = 1-b/r-g
I am struggling to understand why we assume that the retention ratio for the Justified trailing PE ratio will grow at g, but we do not make the same assumption for the Justified forward PE ratio, can someone explain why?
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You’re not assuming that the retention ratio will grow at g; you’re assuming that earnings will grow at g:
E1 = E0 × (1 + g).
Thus, for trailing P/E you’re dividing by a number (E0) that is smaller by a factor of (1 + g), so the ratio is larger by a factor of (1 + g); for leading P/E you’re dividing by a number (E1) that is larger by a factor of (1 + g), so the ratio is smaller by a factor of (1 + g).
 
Thanks S20000, It’s always good to have you around. I added the extra 0 to say thank you. :)
 
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