Hey guys. Can anyone explain to me why in problem #10 of study session 12 they added a 1 before the justified price to book formula. I thought is was P/B= ROE-r/r-g. In the problem you are asked to solve for ROE but they use P/B=1+ ROE-r/r-g. What am I missing?
nothing simplify, use a simple bit of algebra and you will see that both expressions are the same 1+(ROE-R)/(R-G) = [R-G+ROE-R]/(R-G) = (ROE-G)/(R-G)
I see my mistake now thanks for the help.
Might want to make sure you have the formula right too, btw. P/B = (ROE-g) / (r-g)
Intuitively, P/B = B/B + (premium/B) = 1 + (ROE-r)/(r-g) so (premium/B) = (ROE-r)/(r-g)
BizBanker - That’s all fine and dandy but I prefer to remember what’s written in CFAI Book 4, page. 512: P0/E0 = (ROE - g) / (r - g)
In the book I think its P0/B0, not P0/E0
That may be the difference between us. I like to understand the intuition behind the equations instead of memorizing them. Thats what I was always tested on vs. plug and play.
Agree, but with this many formulas you may not have time to truly understand all of them.