example on pg 282 schweser bk 3: implied growth rate calculated to be 9.67%. i used a different formula to calculate the g i.e. the justified P/B, which is easier. P/B = (ROE - g)/(r - g) which gives me a growth rate of 7.25%. 1. why do the formulas give different answers? 2. surely since i was given P/B, i am free to use whichever formula i please. how do i know which formula to use?
becuase the formula you use is for the justified/intrinsic P/B ratio. unless told, you cannot assume that the market price and P/E observed in the market is at intrinsic value. therefore, since they are giving you the observed market P/B ratio, use their formula so you can extra out the market price (V) of 20.
makes sense. thanx.
Not sure how you got 7.25 with (ROE-G)/(r-g) 2.5=(0.13-g)/(0.11-g) or 0.275-2.5g = 0.13-g 1.5g = 0.145 g=9.67% if you realized that P/B = (roe-g)/(r-g) = 1 + (roe-r)/(r-g) which is what they have used - you would be able to solve either way.