Implied Growth Rate

CFA Level II
#1

Hi,

P/B Ratio of 2.50. ROE is expected to be 13%, current book value per share is 8 and the cost of equity is 11%. Calculate the implied growth rate by the current P/B Ratio.

Answer is 9.67%

Why cant we use (ROE-g)/r-g formula for this. When I use this formula, I get a different answer.

#2

You get 9.67% when using the justified P/B formula.

2.5 = (.13-g)/(.11-g)

.275-2.5g=.13-g

.145=1.5g

.0967=g

#3

Let’s give it a try:

P/B = (ROE – g)/(r – g)

2.5 = (13% – g)/(11% – g)

2.5(11% – g) = 13% – g

27.5% – 2.5g = 13% – g

14.5% = 1.5g

g = 14.5% / 1.5 = 9.67%.

Seems to work.

#4

Holy crap! My brain is so overwhelmed that I am doing simple math wrong!