CFA Practice Question

There are 201 practice questions for this study session.

CFA Practice Question

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?

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.
Correct Answer: A

The depreciation rate of the asset is determined upon its purchase. However, if technological progress is much quicker than expected and thus the assets losses market value much quicker than initially thought, then the book value may actually overestimate the true value of net assets.

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