Hi, on the justified P/B multiple, can someone please explain how E = B X ROE? Does B stand for book value?
How does the justified P/B ratio = (ROE - g) / (r-g) ?
Thanks!作者: mik82 时间: 2011-9-10 04:30
B is earnings retention rate...
Edited 1 time(s). Last edit at Thursday, March 13, 2008 at 08:35PM by planner.作者: KungFuPanda 时间: 2011-9-10 04:35
I should've known that. .it def. makes sense logically. . .I got confused b/c little b is used to represent retention rate elsewhere. .
But how does justified P/B = (ROE - g) / (r-g)?
Thanks planner!作者: cv4cfa 时间: 2011-9-10 04:39
sorry...my challenges with attention led me to only see the question regarding "b"...
I am not the one to answer the rest of the question. I have just memorized to use the Gordon Growth Model with justified price multiples (r-g as the denominator)...
Can anyone help?作者: bbtomato 时间: 2011-9-10 04:44
Don't have the answer in front of me, but if you look at the CFAI text in the footnotes it shows the transformation of the Gordon Growth to P/B.作者: willsucceed 时间: 2011-9-10 04:48
B should be book value in that formular.作者: mp3bu 时间: 2011-9-10 04:53
good catch dispatra...
g=ROE x b where b = retention rate...作者: thommo77 时间: 2011-9-10 04:57
Yes.
All of P/E, P/B, P/S formular can be derived from GGM. You need to plug in g = ROE * b, and E = B X ROE to GGM model. I think it is in the CFAI book as previous poster said.作者: torontoanalyst 时间: 2011-9-10 05:02
Thanks everyone. I've been relying mostly on Schweser books, which have been helpful, but for a deeper understanding I should def. be looking at the CFA books.作者: iteracom 时间: 2011-9-10 05:06
I will put one here as a practice. Hope it is all good.
P0 = (V1)/r-g;
maratikus Wrote:
-------------------------------------------------------
> good explanation, disptra.
>
> another formula that is helpful is
>
> P/B = (ROE-g)/(r-g) = (ROE-r+r-g)/(r-g) = 1 +
> (ROE-r)/(r-g)
>
> P/B > 1 if ROE > r
Nice. This proves when there is dividend RI model and GGM model are same.
It seems the key assumption to make these 2 equal is g = b * ROE, everything else is by definition.作者: Valores 时间: 2011-9-10 05:20
yes, the key assumption is perpetual constant growth g = b*ROE作者: bpdulog 时间: 2011-9-10 05:24
Heh Bro
This will surely help
Po = D1/r-g
Since we are calculating BV which comes from E1 = Bo x ROE (remember B here is the BVPS not ret rate)
If we divide both sides by Bo
Po/Bo = (D1/Bo)/r-g
from the above formula-
= ((D1 x ROE)/E1)/r-g
Notice that E1 is there, therefore we have not used ( x 1+g). If Eo had been in the formula, we would have added a term ( x 1+ g) like what we do in Po/So ratio
Now, D1/E1 is the payout ratio or 1-b
= ((1-b) x ROE )/ r-g
