Earnings Multiplier Model from DDM

c. show how to use the DDM to develop an earnings multiplier model, and explain
the factors in the DDM that affect a stock’s price-to-earnings (P/E) ratio;


DDM model in terms of price (when the market is in equilibrium - each stock's is equal to its value determined by DDM model)
P = D1/k-g


Dividing both sides by E1 (Expected Earnings per share)

P/E1 = (D1/E1)/k-g

so the equilibrium P/E1 ratio is determined by D1/E1, k and g and the DDM model can be used to develop the earnings multiplier model also.