CFA Practice Question

There are 290 practice questions for this topic.

CFA Practice Question

If we are evaluating two stocks, X and Y, with the same justified P/B, and X has a higher ROE, all else equal:
A. X is relatively undervalued.
B. Y is relatively undervalued.
C. We cannot conclude which one is undervalued.
Explanation: This is because the justified P/B is an increasing function of ROE.

User Contributed Comments 6

User Comment
siggarusfigs but it says their JUSTIFIED p/b 's are the same
siggarusfigs all else equal with a higher roe, they couldn't have the same justified p/b
philjoe justified p/b's are the same not possible if ROE is different and all else equal!

would be undervalued if ACTUAL p/b were the same
albert9 What if X has a much higher level of debt, cant it be fairly valued despite having higher ROE?
b25331 The question just stresses your intuitive viewpoint.
If both P/B's are equal but X's ROE is higher, you intuitively must assume that relatively higher ROE's should trade at higher multiples.
In the real world however, either g or r must change (try Solver) in order to produce equal P/B's with different ROE's
akshay9 With a higher ROE, X's P/B should have been higher, but it's still equal to Y's P/B so X's P should be less.
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