CFA Practice Question

There are 191 practice questions for this study session.

CFA Practice Question

Which of the following is the least accurate rationale to justify the use of a P/B ratio as a measure of relative valuation of companies or common stocks?
A. Compared to P/E, the P/B ratio is not influenced by such accounting effects as expensing a capital investment as opposed to capitalizing it.
B. P/B is particularly appropriate for valuing companies primarily composed of liquid assets (for example, those in the financial services industry).
C. P/B is a useful measure of value for firms that are not expected to continue as a going concern.
Explanation: It is incorrect to say that P/B correctly reflects a company's value. The historical cost basis of assets in the P/B ratio is a drawback, not a rationale for using it as a measure of relative valuation.

User Contributed Comments 0

You need to log in first to add your comment.