In what conditions, the PE/G & DEF/G are equal?
Assignment :
In what conditions PEG relates to Discounted Earnings Flow?
.
Solution:
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Conditions:
Dividends Yield —> Clean Discount
Dividends Yield Factor ÷ Clean Discount Factor
= Let's say 1.000000001
.
Remaing Life = Growth
.
We have,
.
Discounted Earnings Flow, P
= EPS × Dividends Yield Factor ÷ Clean Discount Factor × ( 1 - ( Dividends Yield Factor ÷ Clean Discount Factor )^ Growth ) ÷ ( 1 - Dividends Yield Factor ÷ Clean Discount Factor )
= EPS × G
Equivalent to :
P/E ÷ G = 1
PEG = 1
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EXAMPLE :
EPS = 3
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G = 25 %
.
Remaining Life
= G
= 25 Years
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Dividends Yield Factor ÷ Clean Discount Factor
= 1.000000001
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Discounted Earnings Flow, P
= EPS × Dividends Yield Factor ÷ Clean Discount Factor × ( 1 - ( Dividends Yield Factor ÷ Clean Discount Factor )^ Growth ) ÷ ( 1 - Dividends Yield Factor ÷ Clean Discount Factor )
= 3×1.000000001×(1-1.000000001^25)÷(1-1.000000001)
= 75.000000975
= 75.0000 (up to 4 significant decimals)
Or
= EPS × ROIC
= 3 × 25
= 75
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Summary:
When Compounding Remaining Life Runway is equal to the Growth Rate Number, and the Dividend Yield could cancel out the Clean Discount Rate, in such conditions, the PE/G & DEF/G are equal.