Justified P/B

[Thecodont]

I am far more likely to be able to recall a formula if i understand how it is derived. The justified P/E makes perfect sense but can someone help me with the intuition behind why P/B is ROE-g rather than ROE x (1+g)

 

[cpk123]

P/E1 = b/(r-g)
E1 = ROE.B0
P/B0 = b.ROE/(r-g)
b = retention ratio. (corrected…. so (1-b) = Payout)
(1-b).ROE = g
ROE-b.ROE = g
b.ROE = ROE-g
hence P/B0 = (ROE-g)/(r-g)

 

[Thecodont]

thanks I got a bit confused since b elsewhere is the retention rate but I think i got t

 

[preppie]

b= payout ratio??? I thought b was retention rate and D1/E1 or (1 - b) a payout.

 

[Thecodont]

it is