Schweser notes question, Study Session 11 question

andytrader

On page 72, Why are we using a retention ratio of 1.50/3.00 which is using the CURRENT dividend/earnings when figuring out LEADING justified p/e?
It is clear on page 71 that the formula for LEADING P/E uses D1/E1 to get 1-b.

Carson

If the growth rate in dividends is constant, the growth rate in earnings has to be constant (and same).

JGovender

Sorry, I still don’t get it.  If the growth rate in dividends is constant (3.5%), the growth rate in earnings is not known so we don’t know if the payout ratio is the same (i.e. D1/E1 = D0/E0).  I’m probably missing something obvious here.

pogo

To use the justified leading (or trailing) P/E formula, growth rate has to be constant. In such a case, D0/E0 = D1/E1.