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Basic Question 5 of 8
Which of the following statements is the LEAST ACCURATE with respect to the drawbacks of using the price/book value (P/B) ratio for valuation purpose?
B. Book value fails to capture the intrinsic value of assets that are not recognized by accounting methods and the use of varying accounting policies often times makes the comparability of book values among firms difficult.
C. Inflation often causes book values to underestimate the true value of net assets.
A. Technological change often causes book value to underestimate the true value of net assets.
B. Book value fails to capture the intrinsic value of assets that are not recognized by accounting methods and the use of varying accounting policies often times makes the comparability of book values among firms difficult.
C. Inflation often causes book values to underestimate the true value of net assets.
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I am happy to say that I passed! Your study notes certainly helped prepare me for what was the most difficult exam I had ever taken.
Andrea Schildbach
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.