Can someone help explain an example of market versus book value from a worked example?
Hello, I am reading How Finance Works by Mihir Desai and it's a good book. He is describing the difference between book and market value, and I get the basic idea - the capital invested in a firm, versus how the market values the company, which is based on some expectation of future growth. He gives an example which plays with three factors: (i) return on equity (ii) discount rate, and (iii) earnings retention rate.
The idea is a firm starts with $100 invested, there is a ROE of 20%, a discount rate of 15%, and a earnings retention rate of 50%. After 10 years, the firm is liquidated and so we are asked to calculate the market to book ratio.
I see and understand the numbers presented in the table, but I cannot see how the final figure (a market to book ratio of 1.36) is calculated as the present market value of $135.89 seems to jump of the page.
Can anyone explain how this works?
(I've added a flair of "homework" but this isn't really homework - I'm just doing some background reading to help me understand accounting as an engineer.
Thanks in advance.
Edited: to make it clear that it's the $135.89 figure I don't understand.
