CFA Practice Question

There are 201 practice questions for this study session.

CFA Practice Question

Given the information below:

  • EPS: $4.68.
  • Book value per share: $20.32.
  • Earnings retention ratio: 60%.
  • Required rate of return on equity: 18%.
  • Required rate of return on debt: 10%.
  • Debt ratio (debt / capital): 40%.

The P/BV ratio is ______.
A. 2.13
B. 2.19
C. 2.35
Explanation: ROE = EPS/BVPS = 4.68/20.32 = 23%.
g = ROE x retention ratio = 23% x 60% = 13.8%.
P/BV = (ROE - g) / (r - g) = (23% - 13.8%) / (18% - 13.8%) = 2.19

User Contributed Comments 4

User Comment
bmeisner That was a particularly tricky problem. I calculated forward P/B working off the justified P/E equation and got 2.51. Have to make sure not to include the (1+g) term when they ask for P/B because it refers to trailing P/B. Notice that 2.51/1.138 ~ 2.19.
Reinhard2 Yes, I also fell into the same trap. It looks like ROE is generally defined as ROE=E1/B0.
Footnote on Page 448/Vol4.
But they didn't make it look like EPS was E1, and Book value was B0.
Yurik74 Why we use required return on equity but not the required wacc?
broadex No WACC unless capitalised Cashflow method is used.
You need to log in first to add your comment.