Justified P/E formula devices, derived, equation, only, like

mamuka12

At the risk of sounding like a remedial math student, can someone explain to me how the justified P/E formula is derived from the Gordon Growth model? Specifically, I am confused as to why P=D/r-g turns into P/E=(D/E)/(r-g). Book doesn't help.

Left to my own devices, I would divide the entire right side of the equation by E (or multiply by 1/E, whatever), but it shows up only in the numerator. Anyone else have a hard time making sense of that?

I know I should spend my time on more productive things but it's making me crazy.

chaojimali

P=D/r-g ==> divide E on both side you get ==> P/E=(D/E)/(r-g)

like how they derive the Du pont model

onelife1

D/r-g = D * 1/(r-g)

times 1/E

= D * 1/E * 1/(r-g)

= D/E * 1/(r-g)

= (D/E)/(r-g)

sameeragarwal

The short answer is that dividing "only the numerator" or the "whole side" in this case is the exact same thing.

Omar has a great example right above me...

bdavi77962

nycag04 Wrote:
-------------------------------------------------------
> Thanks for the reply. What I'm not understanding
> is why you divide only the NUMERATOR (D)of the
> right side of the equation by E. Why doesn't the
> entire right side get divided by E?


If you divide the numerator and denominator by the same amount, you are doing nothing as it cancels out. So dividing by something means always dividing the numerator by it.