How Justified P/Book value ratio is derived :

P/B = (ROE - g) / (r - g)

How Justified P/Book value ratio is derived :

P/B = (ROE - g) / (r - g)

Hey,

So here goes:

V_{0} = D_{1}/(r-g)

D_{1} = EPS_{1} (payout ratio)

Payout ratio = (1- retention ratio). Retention ratio is known as b, hence (1-b)

Rephrase the entire equation,

V_{0} = EPS_{1} (1-b)/(r-g)

Since we need the price to book, divide both sides by BV, we get

V_{0}/BV = EPS_{1}/BV (1-b)/(r-g)

EPS/BV = ROE and ROE*b = growth, so we finally have:

P/BV = (ROE - g)/(r - g)

Hope this helps.

ok Thanks. Got It