justified P/BV formula

CFA Level II Equities
#1

I get formula 1 from dividing the gordon growth formula by BV and the book tells use that this simplified to formula 2.

But in questions, they never give the same answer.

I have no interest in learning the derivation of formula 2 but can someone give some insight into it? Does it have some additional assumptions? Why is it used when the extra input for formula 1 (payout ratio) is readily available?

#2

http://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/9945334

http://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/9964758

http://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/91337530

http://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/91318771

take your pick

#3

Thanks, so its assuming sustainable growtg rate - constant capital structure - no new equity so formula 1 ≠ formula 2 implies g ≠ Roe * b, does that imply the company changed capital structure?

#4

you need to be carefull with leading/trailing substitutions.

it’s OK to switch ROE0 for ROE1 since you assume they are constant.

payout = 1-b, so the last equation in 1 has been multiplied by 1+g, so this looks like P1/B0. its no different from D1/D0 manipulation… i.e. read the question.