Justified P/B Calculation

Hey guys,

I’ve been calculating Justified ROE as (ROE - r)/(r-g) this entire time and yesterday on the mock exam the answer that was given was calculated as (ROE - g)/(r - g). Is there a time when I should be using this formula instead? It was literally driving me insane.

You mean justified P/B ratio?

I do, yes. Sorry.

It’s always ROE-g / r-g

If ROE = r, then it trades at 1 PB.

It looks like you were originally thinking of


Which is used in the residual income model. *Bo= Beginning BV

^ James, believe you need to add one more piece to that formula for RI model.

P = B0 + [(ROE-r)*Bo]/(r-g)

which can then be re-arranged to get to:

P/Bo = 1 + [(ROE-r)]/(r-g) in the RI model… (which is where fluffhead probably got mixed up).

Ah, thats it! Thanks everyone.

His version is MVA I believe.

What’s a fluffhead, anyway?