Justified P/B multiple multiple, someone, please, stand, value

dmar

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!

mik82

B is earnings retention rate...



Edited 1 time(s). Last edit at Thursday, March 13, 2008 at 08:35PM by planner.

KungFuPanda

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!

cv4cfa

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?

bbtomato

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.

willsucceed

B should be book value in that formular.

mp3bu

good catch dispatra...

g=ROE x b where b = retention rate...

thommo77

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.

torontoanalyst

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.

iteracom

I will put one here as a practice. Hope it is all good.
P0 = (V1)/r-g;

P0/B0 = V1/B0/r-g plug in B0 = E1/ROE,
p0/B0 = (V1 / E1) *ROE/r-g = (1-b) * ROE/r-g = ROE-g/r-g