Bridge over ocean
1 December 2011 Research Foundation

Price-to-Earnings Ratios: Growth and Discount Rates

  1. Andrew Ang, PhD
  2. Xiaoyan Zhang
Price-to-Earnings Ratios: Growth and Discount Rates View the full book (PDF)

We decomposed the market-level P/E into a no-growth component, which depends only on future discount rates, and a growth component, the present value of growth opportunities. In valuing both components, we allowed for time-varying risk-free rates, predictable cash flows, stochastic payout ratios, and changing discount rates. Growth opportunities account for approximately 95 percent of the variation and 80 percent of the level of historical P/Es.

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