Justified P/B conclusion, regarding, different, exercises

CFA4Techie

Hi guys,

I have a concern regarding the formula to use for the Justified P/B:

- In the CFAI theory, it gives: (ROE-g)/(r-g) Book4 p.512
- In Secret Sauce, same formula...
- But in the solution of the exercises, it gives: (solutions are on p.629)
P/B = 1+ ((ROE-g)/(r-g))

Where is the problem? Is the answer to the solution correct? Unfortunately the conclusion to the question is totally different due to this +1 added...

Thanks for your help! And good luck with further studies!!



Paul

zhaoyp

You did not get what he told. Please see the formula once again in P629. It is 1 + (roe-r)/(r-g) which is the same as (roe-g)/(r-g). You dont have to remember two formulas!! They are both one and the same.

Swanand

guys,

use a little simple algebra, will you

1+(roe-r)/(r-g)
= (r-g + roe -r )/(r-g)
= (roe-g) / (r-g)

the 2nd formula is the RI related formula, for a RI in perpetuity.

ROE * BVPS = Net Income
r * BVPS = Equity Charge

so (ROE-r) * BVPS = Net Income - Equity Charge = Residual Income

And P = BVPS + RI in perpetuity
P = BVPS [1+(roe-r)/(r-g)]

CP

FinancialAnaly

Justified P/B = (roe-g)/(r-g). i had never seen the (1+roe-r) or at least dont remember it. I'll take your word for it though.

Know the justified ratios...

xilinx_altera

> - But in the solution of the exercises, it gives:
> (solutions are on p.629)
> P/B = 1+ ((ROE-g)/(r-g))
>
>
>
> Paul

Please check again.

It is given by

P/B = 1 + ROE-r/r-g