Justified P/B

CFA Level II
#1

whe do they use 1 + (ROE - r)/(r - g) --> where does the “1 +” come from? Also, can anyone explain the difference in the numerators of the justified P/B raio and the residual income model: ROE - g vs. ROE - r

#2

expand it and you will see both are the same ROE-g -------- r - g [r-g + ROE-r]/(r-g) = (ROE-g)/(r-g)

#3

ok but why is this done?

#4

it is from Residual Income model: V = B0 + (ROE-r)*B0/(r-g) divide B0 from both sides V/B = 1+(ROE-r)/(r-g) = (ROE-g)/(r-g) this is where justified P/B comes from

#5

Ok got it…but, Also, can anyone explain the difference in the numerators of the justified P/B raio and the residual income model: ROE - g vs. ROE - r

#6

never mind i got it. thanks a bunch