P/B multiple

While calculating justified P/B multiple we put sustainable growth relation i.e. g(SGR)= ROE*b

How can this be right? Growth in the relation is supposed to be the growth that firm is experiencing and the growth that is taken here is sustainable growth( the maximum growth that a company an maintain with a given capital structure, and hence is the dream growth rate of every company, and as with many other dreams, many times does not come true).

Firm normally do not grow at sustainable growth rate. they grow at a rate less than it.

Correct me if i am wrong. SGR=b*ROE is not the relation you use to calculate SGR. You use it to calculate b(retention ratio). SGR is something fundamental to the structure of the company( asset utilization, capital structure etc.). It is the pace at which you grow without running into the need for more financing.

Or is it since it long term growth rate it is assumed that it is equal to SGR(so is suggested by the name, SUSTAINABLE growth rate) and is the growth rate we use in any single step GGM. So we always use SGR in all single step GGM or firm valuation problems??

Any clarification in the issue??

Thanx in advance.

You might be overthinking it. If you know only one growth rate then you can’t do any better than assuming that that is the sustainable growth rate.

Justified P/B = Justified P/E * ( Earnings/Book = RoE)

Justified P/E = (1-b)(1+g)/(r-g) where g = growth rate = b*RoE.