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Basically, when you are using the earning mulitiplier approach, you are using a justified PE to estimate the fair value of a stock price. For example if we think that a reasonable price for stock A should trade at a PE of 10. We would use this PE to estimate the fair value of the stock once we have the forecast EPS for next year. Example if foward EPS is 5 cents then the fair value of the share price now should be 50 cents.
Actually, the required return of 10.5% can also be derived by using the formula: D1/P + g = 10.575%.
The formula for the justified PE is :
P = D1/ (r-g)
Dividing by E on both side, you get
P/E = D1/E / (r-g) which is
P/E = Dividend payout ratio/ (r-g)