It seems like there are two different definitions to the P/B formula. In the cash flow section it says that: P/B = (ROE - r) / (r-g) In the residual income section, it says that: P = B + [((ROE - r) x B) / (r-g)] which simplifies to P/B = 1 + (ROE - r) / (r-g) Any I missing something here? Any help would be appreciated. Thanks.
its because in the RI section you have to add in the current BV to the present value sum of all future BV until the residual BV approaches 0. the PB ratio in the CF section doesnt deal with that.
Yes but they should produce the same answer. I don’t understand how you can have two different models with theoretically the same inputs.
I dont think they should produce the same answer, one is a RI model one is not.
pretty sure your P/B is wrong… first one… should be (ROE - G)/(r-g) derived from first principles: P = D1/(r-g) = B0.ROE(1-b)/(r-g) ROE.b = g so P/B = (ROE-g)/(r-g) b = retention ratio.
therefore the two formulae are the same…
yea you are right. thanks a lot.