medium · Principles of Finance

In a scenario where a company's return on equity (ROE) is 10% and its cost of equity (r) is 12%, what effect does an increase in the long-term growth rate (g) have on the justified P/B multiple?

1. The P/B multiple decreases because the firm is growing while destroying value.
2. The P/B multiple becomes negative as g increases.
3. The P/B multiple stays the same since g is in both the numerator and denominator.
4. The P/B multiple increases because growth is always positive for valuation.

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