- CFA Exams
- CFA Level I Exam
- Topic 5. Equity Valuation
- Learning Module 25. Market-Based Valuation: Price and Enterprise Value Multiples
- Subject 5. Price to Book Value

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**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.

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**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. |