Seeing is believing!

Before you order, simply sign up for a free user account and in seconds you'll be experiencing the best in CFA exam preparation.

Find out more
Subject 5. Calculating an Implied Growth Rate in Residual Income PDF Download
Assuming the constant growth of residual earnings and constant ROE, we can calculate the growth rate, using this relationship: P / B = 1 + (ROE - r) / (r - g)

g = r - (ROE - r) / (P/B - 1)

Example

  • P/B ratio = 1.50.
  • Expected ROE = 12%.
  • Current book value per share = $9.00.
  • Cost of equity is 10%.

Current market price = 1.50 x $9.00 = $13.50.

Implied growth rate = 0.1 - (0.12 - 0.1) / (1.5 - 1) = 6%.

User Contributed Comments 0

You need to log in first to add your comment.
I was very pleased with your notes and question bank. I especially like the mock exams because it helped to pull everything together.
Martin Rockenfeldt

Martin Rockenfeldt

My Own Flashcard

No flashcard found. Add a private flashcard for the subject.

Add

Actions