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.

economicz

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

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.