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Justified P/B multiple

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!

B is earnings retention rate...



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

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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!

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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?

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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.

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B should be book value in that formular.

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good catch dispatra...

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

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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.

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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.

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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

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