GGM, Leading P/E Ratio, and Trailing P/E Ratio

  • The principles of GGM can be applied to derive Leading and Trailing price to earnings ratios.
  • Leading P/E Model: Based on future earnings.

P0/E1 = (Div1/Earning1)/(rce - g) = k/(rce - g)

Where k is the dividend payout ratio and g assumes that earnings growth and dividend growth are equal rates.

  • Trailing P/E Model: Slight variation based on current dividend and current earnings.

P0/E0 = (Div0 × (1+g) / Earning0)/(rce - g) = (k×(1+g))/ (rce - g)

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