where
EPS 0 = Earnings per share in year 0 (current year)
Payout ratio = Payout ratio in the firstnyears
g= Growth rate in the firstnyears
ke,hg= Cost of equity in high-growth period
Payout ration= Payout ratio afternyears for the stable firm
gn= Growth rate afternyears forever (stable growth rate)
ke,hg= Cost of equity in stable-growth period
DividingbothsidesoftheequationbyEPS 0 ,wecanestimate
the P/E ratio for a high-growth firm:
ThustheP/Eratioforahigh-growthfirmisdeterminedbythe
same three variables that determine P/E ratios for a
stable-growth firm—the payout ratio, the riskiness of the