Why should I choose AnalystNotes?

Simply put: AnalystNotes offers the best value and the best product available to help you pass your exams.

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.
Thanks again for your wonderful site ... it definitely made the difference.
Craig Baugh

Craig Baugh

My Own Flashcard

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

Add

Actions