Question on justified P/B

CFA Level II
#1

The justified P/B ratio = (ROE-g)/(r-g) formula assumes that E1=B0* ROE. Why not E1=B0*ROE*(1+g) ?

#2

Justified P/B is price per trailing book value. It’s reasonable to assume that E1 = B0*ROE since net Income = Equity*ROE. If you book value is $1 and ROE is 20%, your expected EPS = $1*20% = 20 cents.

#3

Thank you.

#4

correct me if i am wrong, but isn’t justified P/B = roe-r in the numberator, not roe-g??

#5

ROE-g

#6

so am i clearly confusing this with the residual income models or am i Effed up on those too?

#7

ROE-r is for RI ROE-g is for P/B

#8

Petetini, you are just confusing the two. Remember that the numerator in the RI models is based on the ROE-r spread.

#9

petetini Wrote: ------------------------------------------------------- > correct me if i am wrong, but isn’t justified P/B > = roe-r in the numberator, not roe-g?? P/B = (ROE-g)/(r-g) = 1 + (ROE-r)/(r-g)

#10

okay, i see it now…this is a section i looked at a long time ago and went back to it this weekend…woke up thinking about it as well. Thanks for the help.

#11

! my boo-boo