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**CFA Practice Question**

Given the information below:

- EPS: $4.68.
- Book value per share: $20.32.
- Earnings retention ratio: 60%.
- Required rate of return on equity: 18%.
- Required rate of return on debt: 10%.
- Debt ratio (debt / capital): 40%.

The P/BV ratio is ______.

A. 2.13

B. 2.19

C. 2.35

**Explanation:**ROE = EPS/BVPS = 4.68/20.32 = 23%.

g = ROE x retention ratio = 23% x 60% = 13.8%.

P/BV = (ROE - g) / (r - g) = (23% - 13.8%) / (18% - 13.8%) = 2.19

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**User Contributed Comments**
4

User |
Comment |
---|---|

bmeisner |
That was a particularly tricky problem. I calculated forward P/B working off the justified P/E equation and got 2.51. Have to make sure not to include the (1+g) term when they ask for P/B because it refers to trailing P/B. Notice that 2.51/1.138 ~ 2.19. |

Reinhard2 |
Yes, I also fell into the same trap. It looks like ROE is generally defined as ROE=E1/B0. Footnote on Page 448/Vol4. But they didn't make it look like EPS was E1, and Book value was B0. |

Yurik74 |
Why we use required return on equity but not the required wacc? |

broadex |
No WACC unless capitalised Cashflow method is used. |