CFA® Level I question of the day
17 October 2026 · Equity Investments
A company has a sustainable ROE of 12%, a required return on equity of 10% and a growth rate of 4%. What is its justified price-to-book ratio?
Show the answer and explanation
Answer: A. 1.33
Justified P/B = (ROE - g)/(r - g) = (12% - 4%)/(10% - 4%) = 1.33. The company earns 12% on book equity while investors demand 10%, so each unit of book value is worth more than one unit of market value.
- B. 1.20 - This is ROE divided by the required return, which omits growth from both the numerator and the denominator. Growth changes the ratio unless ROE and the required return are equal.
- C. 0.80 - This subtracts growth from ROE but not from the required return. The denominator must also be net of growth, since only the excess return is capitalised.
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