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**CFA Practice Question**

The P/BV ratio is positively related to ______.

II. return on equity

III. required rate of return

IV. earnings growth rate

I. dividend payout ratio

II. return on equity

III. required rate of return

IV. earnings growth rate

Correct Answer: II only

P/BV = (ROE - g) / (r - g). Empirical studies have also proved a strong positive relationship between the company's long-term growth and its P/B multiple but the relationship is not indicated by the equation.

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**User Contributed Comments**
4

User |
Comment |
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mysking |
why not? as g = b x ROE, if P/B is proportional to ROE then it is also proportional to g. imply P/B always positively correlated to the growth rate? |

ehc0791 |
From the equation, it depends on ROE and r, if ROE > r, P/BV has positive relationship, otherwise, negative; because g is subtracted from both numerator and denominator |

Lavay |
True |

sahilb7 |
Interesting! |