Use the equation P0 = (K * EPS1 ) /r-g) to demonstrate the relationship between the price-earnings model and the constant growth dividend model

P0 = the current price per share of stock, K = the dividend payout ratio, is the forward looking earnings per share, r is the required rate of return for common stock, and g is the anticipated constant rate of growth.

=
Using algebra we see that, all else equal, the forward-looking price-earnings multiple is directly related to growth–because a higher g is associated with a higher P0/EPS1–and inversely related to risk–because a higher r (the expected or required return by common share investors) is associated with a lower P0/EPS1.