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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.

TOP

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!

TOP

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.

TOP

B should be book value in that formular.

TOP

good catch dispatra...

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

TOP

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.

TOP

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.

TOP

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

TOP

good explanation, disptra.

another formula that is helpful is

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

P/B > 1 if ROE > r

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