Topic Test Level 2 – Equity , Valentine Case

Hi @rogileiza, 

I understand that the formulas to get the justified trailing and leading multiples are counter intuitive. You’d think that the leading multiples would have the (1+g) and the trailing would not have the growth factor. However, it is backwards. Below are the derivations using the GGM:

justified trailing P0/E0=(1-b)(1+g)/(r-g)
justified leading P0/E1=(1-b)/(r-g)

Using the Gordon Growth Model: 

justified trailing
P0=D0(1+g)/(r-g) using the GGM – then divide everything by E0

P0/E0=(D0/E0)(1+g)/(r-g) – D0/E0 = Dividend payout = (1-b) at time=0

Then – P0/E0=(1-b)(1+g)/(r-g)

leading trailing 
P0=D1/(r-g) using the GGM – then divide everything by E1

P0/E1= (D1/E1)/(r-g)  – D1/E1 = dividend payout at time=1

Then – P0/E1=(1-b)/(r-g)