justifiedLeadingPE {stockAnalyst}

Calculates Justified Leading P/E based on the Gordon Growth Model.

Description

The price-to-earnings ratio (P/E) is perhaps the most widely recognized valuation indicator, familiar to readers of newspaper financial tables and institutional research reports. Using the Gordon growth model, an expression for P/E in terms of the fundamentals can be developed. When used with forecasts of the inputs to the model, the analyst obtains a justified (fundamental) P/E ; the P/E that is fair, warranted, or justified on the basis of fundamentals (given that the valuation model is appropriate). The analyst can then state his or her view of value in terms not of the Gordon growth model value but of the justified P/E. Because P/E is so widely recognized, this method may be an effective way to communicate the analysis. Leading and trailing justified P/E expressions can be developed from the Gordon growth model. Assuming that the model can be applied to valuation of a particular stock, the dividend payout ratio is considered fixed. In leading P/E, current price is divided by earnings of next year (Jerald E. Pinto, 2020).

Usage

justifiedLeadingPE(rCAPM, payoutRatio, g)

Arguments

rCAPM

A number.

payoutRatio

A number.

g

A number.

Details

According to information provided by Jerald E. Pinto (2020), the method justifiedLeadingPE is developed for computing Justified Leading P/E Based on the Gordon Growth Model for the values passed to its three arguments. Here, rCAPM is required rate of return based on CAPM (Capital Asset Pricing Model), payoutRatio is payout ration, and g is dividend growth rate.

Value

Input values to three arguments rCAPM , payoutRatio and g.

Author(s)

MaheshP Kumar, [e-mail]

References

Pinto, J. E. (2020). Equity Asset Valuation (4th ed.). Wiley Professional Development (P&T). https://bookshelf.vitalsource.com/books/9781119628194

Examples

justifiedLeadingPE(rCAPM=0.09,payoutRatio=0.32,g=0.07)
justifiedLeadingPE(rCAPM=0.125,payoutRatio=0.90,g=0.03)