Quick question for anyone who may a know to rationalize this. One way to get the justified P/B is: ROE - g ______ r - g I just can’t wrap my head around how you can make any determinations about book value of a firm just using ROE, growth rate and Required Return. Am I thinking about this wrong? Thanks in advance to anyone who can help me out with this one.
have you done any of the residual income chapter work? book value equity * ROE = net income ? subtract required return and get the RI? this should be directly connected to P/BV and make sense.
you’re isolating ROE vs. required reuturn on equity by removing growth factor to get a better sense of how much value the firm is receiving from the market
There was a Schweser Vol 1 question related to deriving this formula, but i can’t remember where…