Justified P/B

CFA Level II
#1

ROE-g/(r-g) Is this formula for justified P/B for leading or trailing P/B?

#2

it’s always trailing P/B because it’s hard to forecast leading BV

#3

thats the formula for justified P/B

#4

The justified P/B ratio based on fundamentals: P0/B0 = (ROE - g) / (r - g) P/B is an increasing function of ROE, all else equal. The larger the ROE in relation to the required rate of return ®, the higher the justified P/B ratio. However, does this mean that P0 = ROE - g and B0 = r-g ? how is that so?

#5

Thanks.

#6

maratikus Wrote: ------------------------------------------------------- > it’s always trailing P/B because it’s hard to > forecast leading BV Isn’t this exactly what we do with RI models?

#7

mwvt9 Wrote: ------------------------------------------------------- > maratikus Wrote: > -------------------------------------------------- > ----- > > it’s always trailing P/B because it’s hard to > > forecast leading BV > > Isn’t this exactly what we do with RI models? in some sense. P is predicted using one out of many methods and then we need to normalize it. it is easier to normalize it using adjusted BV than forecasted adjusted BV. There should be a much better explanation than mine but using trailing adjusted BV is the standard way.