Justified Price to Book question, around, growth, about, wrong

lunarfollies

Quick question for anyone who may a know to rationalize this.

One way to get the justified P/B is:

ROE - g
______

r - g


I just can't wrap my head around how you can make any determinations about book value of a firm just using ROE, growth rate and Required Return. Am I thinking about this wrong?

Thanks in advance to anyone who can help me out with this one.

huangxiaoxie

have you done any of the residual income chapter work? book value equity * ROE = net income ? subtract required return and get the RI? this should be directly connected to P/BV and make sense.

economicz

There was a Schweser Vol 1 question related to deriving this formula, but i can't remember where...