Hi guys, I have a concern regarding the formula to use for the Justified P/B: - In the CFAI theory, it gives: (ROE-g)/(r-g) Book4 p.512 - In Secret Sauce, same formula… - But in the solution of the exercises, it gives: (solutions are on p.629) P/B = 1+ ((ROE-g)/(r-g)) Where is the problem? Is the answer to the solution correct? Unfortunately the conclusion to the question is totally different due to this +1 added… Thanks for your help! And good luck with further studies!! Paul
> - But in the solution of the exercises, it gives: > (solutions are on p.629) > P/B = 1+ ((ROE-g)/(r-g)) > > > > Paul Please check again. It is given by P/B = 1 + ROE-r/r-g
Justified P/B = (roe-g)/(r-g). i had never seen the (1+roe-r) or at least dont remember it. I’ll take your word for it though. Know the justified ratios…
guys, use a little simple algebra, will you 1+(roe-r)/(r-g) = (r-g + roe -r )/(r-g) = (roe-g) / (r-g) the 2nd formula is the RI related formula, for a RI in perpetuity. ROE * BVPS = Net Income r * BVPS = Equity Charge so (ROE-r) * BVPS = Net Income - Equity Charge = Residual Income And P = BVPS + RI in perpetuity P = BVPS [1+(roe-r)/(r-g)]
You did not get what he told. Please see the formula once again in P629. It is 1 + (roe-r)/(r-g) which is the same as (roe-g)/(r-g). You dont have to remember two formulas!! They are both one and the same.