Residual Income: Implied growth rate

CFA Level II
#1

I don’t want to remember that formula but I’ve some problem to derive the implied growth rate from the residual income model:

from

V0=B0+((roe-r)xB0/(R-g))

To

G=R-(B0x(ROE-r)/(V0-B0))

I can’t figure out where the -B0 on the denominator come from…

#2

Don’t bother trying to remember this formula, just do the algebra on the exam if need be

1 Like
#3

Agreed, same with the H-Model.

1 Like
#4

I’m not the best at algebra, but I think it is this:

V0 = B0 + B0(ROE -R)/(R-G)

V0 - B0 = B0(ROE -R)

(R-G)(V0 - B0) = B0(ROE -R)

R-G = B0(ROE -R)/(V0 - B0)

-G = -R + B0(ROE -R)/(V0 - B0)

G = R - B0(ROE -R)/(V0 - B0)

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#5

thank you rawraw for the explanation. you wrote it in 2013 and it helped me in 2016! internet is so f** awesome

#6

Also do the same with relative ratios (trailing and leading).Book provide bunch of formally.If you understand one let us say P/E leading you can derived other X formula with small algebra.