The Graham & Dodd P/E Matrix 
Based on his observations of stock
over the years, Benjamin Graham developed a stock valuation model that
allows for future growth. Graham observed that the average nogrowth
stock sold at 8.5 times earnings, and that priceearnings ratios
increased by twice the rate of earnings growth. This led to the
earnings multiplier:
P/E = 8.5 + 2G
where G is the rate of earnings growth, stated as a percentage.

The original formulation was made
at a time when there was very little inflation, and growth could be
assumed to be real growth; the AAA corporate bond interest rate
prevailing at the time was 4.4%. In later years, the formula was
adjusted for higher current interest rates that contained an
inflationary component:
P/E = [8.5 + 2G] × 4.4/Y
where Y is the current yield on AAA corporate bonds. 
As an example, at a 6% bond yield
and an assumed annual earnings growth rate of 10%, the P/E multiplier
would be:
P/E = [8.5 + 2(10)] × 4.4/6
= 28.5 × 0.73
= 20.9 
The Graham and Dodd P/E Matrix uses
this valuation formula to show the priceearnings ratio that results
from a given bond yield at a given rate of earnings growth. You can
see from the table that changes in interest rates will have a dramatic
effect on priceearnings ratios for any given earnings growth rate.
