With only the below givens to calculate the P/E
Required rate of return on equity 16.0% Weighted average cost of capital (WACC) 13.0% Long-term profit margin 8.0% Projected dividend payout ratio 70.0% Expected long-run earnings growth rate 4.8%
Why would the ROE of 16% be used as if it is the required rate of return?
Required rate of return is the same thing as required rate of return on equity which is the same thing as the required roe… your required return is on the equity that you have… .
This question points out everything that is wrong with using P/E as a valuation method because it is a static ratio. (1-b)/(r-g) can be effectively interpreted as 1/ROE when r = ROE.