One of the themes of the book is: Beware of buying growth, for growth is risky. So, chapter 2 cautions about seeing a P/E as indicating growth: The multiple is also determined by the risk to growth. Price in the numerator is based on expected earnings growth but is also discounted for the risk to growth.
In valuation models, growth is incorporated by capitalizing the valuation attribute (for example, residual earnings) by r – g. However, if growth is risky, r (the required return for risk) is related to g (expected growth) so, if g is higher, r is also likely to be higher. Never treat r and g as independent inputs in valuation.
You see this relationship operating in chapter 4, but in a different way. To finesse the fact that we don’t know r, we advised to carry out the reverse engineering exercise with a relatively high r. That builds in a margin of safety. You will have noticed that the higher the r, the higher the g that comes out of the reverse engineering. So, you see the r and g (growth and risk) relationship. In this context, a higher hurdle rate, r, requires higher growth to meet the hurdle. If you deem that growth can be achieved, you have a margin of safety.