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 rationales for using the price/book value (P/B) ratio for valuation purposes?
A. Book value per share is more stable than EPS. Besides, book value is positive even in periods where the company reports negative earnings.
B. Since price is expressed in proportion to book value per share, P/B accounts for the differences which may exist among firms of different sizes.
C. For companies whose assets are mostly liquid, book value per share may reasonable estimate the market value per share.
Explanation: Companies may be of different sizes because of the nature of the business models adopted by each of them. For instance, a lower P/B should not lead one to automatically assume that they have uncovered an undervalued stock.

User Contributed Comments 3

User Comment
ThePessimist C does not match the curriculum, which cautions using P/B to compare firms with different levels of *assets*, such as a manufacturing firm vs. a reseller. It doesn't talk about firms with similar business models but different sizes.
volkovv I think they are implying that different size means different level of assets, and in such case P/BV is not a good measure to use.
REITboy Is C correct? Look at Consulting Firms... Liquid Assets, high returns, and therefore massive P/B.
You need to log in first to add your comment.