R32 - Justified P/B value

[sanjay2210.msl]

How Justified P/Book value ratio is derived :

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

[saurabh03121992]

Hey,

So here goes:

V₀ = D₁/(r-g)

D₁ = EPS₁ (payout ratio)

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

Rephrase the entire equation,

V₀ = EPS₁ (1-b)/(r-g)

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

V₀/BV = EPS₁/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.

[sanjay2210.msl]

ok Thanks. Got It