- CFA Exams
- CFA Level I Exam
- Topic 5. Equity Valuation
- Learning Module 23. Market-Based Valuation: Price and Enterprise Value Multiples
- Subject 5. Price to Book Value
CFA Practice Question
The P/BV ratio is positively related to ______.
II. return on equity
III. required rate of return
IV. earnings growth rate
I. dividend payout ratio
II. return on equity
III. required rate of return
IV. earnings growth rate
Correct Answer: II only
P/BV = (ROE - g) / (r - g). Empirical studies have also proved a strong positive relationship between the company's long-term growth and its P/B multiple but the relationship is not indicated by the equation.
User Contributed Comments 4
| User | Comment |
|---|---|
| mysking | why not? as g = b x ROE, if P/B is proportional to ROE then it is also proportional to g. imply P/B always positively correlated to the growth rate? |
| ehc0791 | From the equation, it depends on ROE and r, if ROE > r, P/BV has positive relationship, otherwise, negative; because g is subtracted from both numerator and denominator |
| Lavay | True |
| sahilb7 | Interesting! |