Can someone show me how the justified P/B multiple formula is derived:
(ROE-g)/(r-g)
I think I’ve been staring at it too long but I can’t figure out how it comes out of g = ROE x b and E1 = B0 x ROE
Thanks
Start with the justified leading P/E ratio:
P0 / E1 = (1 − b) / (r – g)
P0 / (B0 × ROE) = (1 − b) / (r – g)
P0 / B0 = ROE × (1 − b) / (r – g)
P0 / B0 = (ROE − ROE × b) / (r – g)
P0 / B0 = (ROE − g) / (r – g)
u so good wit them magic tricks s2000
Thanks magician!
You’re welcome.
Not sure everyone realizes how absolutely amazing S2000 is. I was on his site maybe 4-5 months ago, and he provides derivations of all the justified price multipes. I replicated it all and taped it to my wall.
He’s now switched to a paywall format, which is totally his right. I mean, he’s invested a tonne of time building dozens of pages of L2 education. And he’s charging a mere $20 USD to access it all – not a full course on L2, I expect, but his full set of L2 content.
Then, in this thread, he’s given away a piece of that content to help a candidate with an issue.
Moreover, he didn’t subject us to a crass “Sign up now for the ultimate in CFA prepartion from the world’s master…” bleh bleh bleh.
Every day, this guy is on here, politely, clearly, precisely explaining the nuances of this insane material. It’s just unbelievable to me. I probably reviewed half his site when it was free, but I’m gonna do the $20 (25.91 CAD %#@) anyway, just to say thank you, and to look again at the material.
Thanks for your kind words, biuku.
Sorry for the unfavorable exchange rate. For what it’s worth, it isn’t my fault.
Agreed s2k’s site is amazing, well worth the money in advice he gives us for free on here alone. Was glad to fork it over
james|1989 are you really CFA charterholder? You should’ve known the answer to your question already 
The assumption is that ROE, b, and g are constant year-to-year.
Check the dates: he wasn’t a charterholder two years ago when he asked the question.
My pleasure.