- CFA Exams
- 2023 Level II
- Topic 5. Equity Valuation
- Learning Module 26. Residual Income Valuation
- Subject 5. Calculating an Implied Growth Rate in Residual Income
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.
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 just wanted to share the good news that I passed CFA Level I!!! Thank you for your help - I think the online question bank helped cut the clutter and made a positive difference.

Edward Liu
My Own Flashcard
No flashcard found. Add a private flashcard for the subject.
Add