justified P/B

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beavertail

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Why is the following sentence incorrect: Company X’s ROE is much higher than its peer. Therefore, on the basis of justified P/B, BTP will appear overvalued relative to its peers with the same P/B. (This is from one of the practice questions set from the CFAI website).
 
I find it hard to follow the statement. X and BPT are the same company?
Sounds like “Oranges have high citric acid levels. Therefore, on the acidity scale, kiwis will taste more sour than other fruits”.
 
I think it doesn’t consider the required return on equity only ROE
 
P/B= (ROE-g)/(r-g)
If the peers also have the same P/B but lower ROE, then to balance the equation these peers must have lower required return, r or higher growth rate, g.
In other words if two companies have the same P/B you can’t say one is overvalued than the other, even if one has a higher ROE. It means their fundamentals are different but in such a manner that they offset each other.
A quick Excel workout using Goal Seek
 
I think it means even when Company X has a higher justified P/B, it still has the same P/B as peers. You can’t say a company with a higher justified P/B is overvalued when they all have the same P/B.
 
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