Residual Income Valuation vs. Justified P/B Ratio
Residual income models can be used to estimate justified price multiples. From the justified P/B ratio based on fundamentals: $$\frac{\text{P}_{0}}{\text{B}_{0}}=\frac{\text{ROE}-\text{g}}{\text{r}-\text{g}}$$ Which is mathematically equivalent to: $$\frac{\text{P}_{0}}{\text{B}_{0}}=1+\frac{\text{ROE}-\text{r}}{\text{r}-\text{g}}$$ The approximated value of a share is the book value per share plus…
