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Basic Question 1 of 8
The P/B multiple of a service company is usually ______ than that of a heavy equipment manufacturer.
B. lower.
C. the same as.
A. higher.
B. lower.
C. the same as.
User Contributed Comments 4
| User | Comment |
|---|---|
| katybo | and the price? |
| danlan2 | Price of a service company is similar to that of a heavy equipment manufacturer. |
| Rchan89 | i think all else equal, a service company has less fixed assets they need to purchase than an auto manufacturer. |
| davidt876 | i dont think it makes sense to comment on the price or book value in isolation. you can justify that the ratio of P/B is higher in the service industry than in manufacturing, but you can't say that P or B are absolutely higher or lower in any industry. even if you found that average book value is higher in an industry, its most likely a function of consolidation or the long-term lifecycle of the industry |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
Learning Outcome Statements
calculate and interpret alternative price multiples and dividend yield;
calculate and interpret underlying earnings, explain methods of normalizing earnings per share (EPS), and calculate normalized EPS;
explain and justify the use of earnings yield (E/P);
describe fundamental factors that influence alternative price multiples and dividend yield;
calculate and interpret the justified price-to-earnings ratio (P/E), price-to-book ratio (P/B), and price-to-sales ratio (P/S) for a stock, based on forecasted fundamentals;
calculate and interpret a predicted P/E, given a cross-sectional regression on fundamentals, and explain limitations to the cross-sectional regression methodology;
evaluate a stock by the method of comparables and explain the importance of fundamentals in using the method of comparables;
calculate and interpret the P/E-to-growth ratio (PEG) and explain its use in relative valuation;
calculate and explain the use of price multiples in determining terminal value in a multistage discounted cash flow (DCF) model;
explain alternative definitions of cash flow used in price and enterprise value (EV) multiples and describe limitations of each definition;
calculate and interpret EV multiples and evaluate the use of EV/EBITDA;
CFA® 2025 Level II Curriculum, Volume 4, Module 23.