Leading P/E derived from Gordon Growth Model

We divide both sides of the formula by E1, rather than numerator and denominator, to my understanding.

P0 = D1 / (r – g)
P0/E1 = (D1/E1) / (r – g)

Where

• P0 = price/value at period 0
• E1 = earnings at period 1
• r = required return
• g = dividend growth rate

We leave (r – g) alone because we want to ‘create’ D1/E1, which is the dividend payout ratio, which is (1 – b):

P0/E1 = (D1/E1) / (r – g)
P0/E1 = (1 – b) / (r – g)