GGM Residual Income because, someone, equity, charge

dvilayphet

Can someone explain why the numerator in the GGM model, (ROE - r) x BV is the same as Earnings - (BV * r)

The second formula makes sense because we are just subtracting an equity charge from earnings.

brainsX

Well I mean the first one just subtracts the return they require (r) from the return they receive and then multiplies that difference by the Book Value. Where as the second one subtracts the return/equtiy charge they require from the earnings they 'receive'.

Houjichasan

^Thanks nielsendc, I was trying to work this out but so bust my mind was full of other crap, I just kept looking at earnings/equity and trying to come to the same conclusion, when I should of started with earnings = ROExBV