Schweser justified P/B problem in residual income why, problem, income, before

bleach

Hey guys. Can anyone explain to me why in problem #10 of study session 12 they added a 1 before the justified price to book formula.
I thought is was P/B= ROE-r/r-g.
In the problem you are asked to solve for ROE but they use P/B=1+ ROE-r/r-g.
What am I missing?

ninja1024

nothing
simplify, use a simple bit of algebra
and you will see that both expressions are the same
1+(ROE-R)/(R-G)
= [R-G+ROE-R]/(R-G) = (ROE-G)/(R-G)

spartanag07

I see my mistake now thanks for the help.

BC_MBA_student

Intuitively, P/B = B/B + (premium/B) = 1 + (ROE-r)/(r-g) so (premium/B) = (ROE-r)/(r-g)

thommo77

In the book I think its P0/B0, not P0/E0 ;)

Kiakaha

That may be the difference between us. I like to understand the intuition behind the equations instead of memorizing them. Thats what I was always tested on vs. plug and play.