intrinsic PE value value

Sunshine4ever

am getting confused
are the following both intrinsic PEs or what is each called
P/E = 1-b/r-g

P/E= I/r+ FF*GF

am confusing which formuar to use when am asked to calculate intrinsic PE

b_sea93

Dreary - the part that is confusing is that Intrinsic PE in presence of inflation ignores the FF/GF terms. Either I'm missing something, or I think it's an oversimplication in the curriculum that assumes the company has zero FF or GF when considering inflation.

Eg, without inflation, intrinsic PE is :
PE = 1/r + FF * GF

Now when we turn on inflation, we adjust the first 1/r term to account for inflation passthrough, but the second FF*GF term is dropped to zero.
PE = 1 / (r - Lambda*inflation)

Its obvious the FF/GF terms are dropped if inflation is zero, it only leaves the first term.

KungFuPanda

Dreary Wrote:
-------------------------------------------------------
> To get the inflation effect easily, think like
> this:
>
> P/E1 = 1/r =====> that we already know.
>
> But r is nominal, so we can adjust it first
> (slowly) like this:
>
> P/E1 = 1/(r-inflation + inflation) =======> no
> change it's the same so far.
>
> Then use lambda (the percentage of inflation that
> passes through):
>
> P/E1 = 1 / [(r-inflation) + (1-Lambda)*
> inflation]
>
> Ignore the book's frmula.


To make it even better, the final line simplifies to:

P/E1 = 1 / (r - Lambda*inflation)

RMontgomery

Intrinsic PE = (1-b) / (r-g) = leading PE
Intrinsic PE = Dividend Payout Ratio / (r-g) = b / (r-g)
Intrinsic PE = Tangible PE + Franchise PE
Intrinsic PE = 1 / (r + (1 - inflation flow thru) *Inflation)

genuinecfa

On a related note how come intrinsic P/E is P(0)/E(1) not P(0)/E(0)???

profil

To get the inflation effect easily, think like this:

P/E1 = 1/r =====> that we already know.

But r is nominal, so we can adjust it first (slowly) like this:

P/E1 = 1/(r-inflation + inflation) =======> no change it's the same so far.

Then use lambda (the percentage of inflation that passes through):

P/E1 = 1 / [(r-inflation) + (1-Lambda)* inflation]

Ignore the book's frmula.

kickthatcfa

Audrey, the two equations you gave originally are one and the same, you can mathematically equate one to the other.

Although there is confusion about the term, as it sometimes refers only to the 1/r term, without PVGO. Eg, how this 1/r term changes in the presence of inflation w/ passthrough.

wilslm

If ROE=r, then either b=0 or g=0, so both are the same, because g=b ROE.

So, if you are given ROE, use P/E= I/r+ FF*GF, else use P/E = 1-b/r-g.

Justified P/E is is the P/E you get if you use the actual price (v0), but you use the same formula.

jarobi04

Spanishek - cd u check the answer to CFAI mock AM question 57 its my source of confunsion.
the question asked for intrinsic PE but they used the leading PE formular
thanks

b_sea93

The first P/E (1-b / r-g ) is the justified leading PE

The second one is the intrisic PE