What the eff? Justified P/B

CFA Level II
#1

I can do these in my sleep by this point, but in question 19, pg. 538 reading 49 of the CFAI equity book, they use the formula 1 + (ROE-r)/(r-g) since when are we adding one, or did I miss something completely?

#2

justified p/b is roe-g/r-g, isn’t it?

#3

yeah, that is what I am saying. I calculated it and got the “correct” answer, but the CFAI answer says we add one. i’d post the question, but I am not sure that is kosher.

#4

so i think that formula they used works.

#5

they have roe-r, not roe-g, though. or is that a typo?

#6

(ROE - g) / (r - g) - that’s the usual formula .20 - .06 / .094 - .06 = 4.12 The other formula works too.

#7

i’m an idiot. it was finding justified P/B using the RI model. so it makes sense now. no typo.

#8

thanks mcleod. its late. time to hang em up for the night.

#9

Yea, they are the same thing. So whichever one is easier to remember for you…