P/B Kaplan Schweser reading 32 practice problem 5

CFA Level II Equities
#1

I find it difficult to remember a lot of the formulas needed for the CFA exam, so instead I try to work them out logically. I know that the P/B ratio is the price per share divided by book value per share (BVPS). BVPS is shareholders equity divided by the number of shares outstanding. Using algebra to figure out what BVPS is and the GGM to find out price I calculated the P/B ratio. However, my answer was incorrect and the end of chapter solutions just provide the formula = (ROE-g)/(r-g) here is how I worked it out:

r= 14% g= 7.6% d0= $1.35 1-b=0.67 ROE= 23%

These were all given.

I worked out the price per share using the GGM.

p0= ($1.35*1.076)/(0.14-0.076) = $22.696875 for BVPS I found EPS by taking $1.35/0.67= $2.014925 and solved for equity using ROE=net income/equity (23%=2.014925/equity). The BVPS should be 8.760545 Therefore, P/B = 22.696875/8.760545 = ~2.59 This is not one of the answers available. Can you tell me where I went wrong?

#2

Its weird if I use D0 as D1 in the GGM it gives me P0= $21.093750.

If I plug this number in with BVPS of 8.760545 it gives me a P/B of 2.407813 which is very close to the answer of 2.41.

Possible that Schweser made a mistake?

#3

It’s the other way round: your share price is fine, but your book value is too _ low _.

You used $1.35 in your EPS calculation: D0. You should have used D1.

Remember, B0 × ROE = E1, not E0.

#4

How does current BVPS (B0) multiplied by earnings/equity (ROE) = E1 and not E0?

What I am seeing is E0/equity = ROE.

E0= ROE* equity

Where does E1 come into play?

#5

Book value on 1/1/17 (= book value on 12/31/16, or B0) times ROE gives you 2017 earnings: E1.