honeycfa

One advantage of using price-to-book value (PBV) multiples for stock valuation is that:

A) most of the time it is close to the market value.

B) book value of a firm can never be negative.

C) it is a stable and simple benchmark for comparison to the market price.

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Book value provides a relatively stable measure of value that can be compared to the market price. For investors who mistrust the discounted cash flow estimates of value, it provides a much simpler benchmark for comparison. Book value may or may not be closer to the market value. A firm may have negative book value if it shows accounting losses consistently.

honeycfa

Which of the following is NOT an advantage of using price-to-book value (PBV) multiples in stock valuation?

A) Book value is often positive, even when earnings are negative.

B) Book values are very meaningful for firms in service industries.

C) PBV ratios can be compared across similar firms if accounting standards are consistent.

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Book values are not very meaningful for firms in service industries.

honeycfa

Of the following types of firm, which is most suitable for P/B ratio analysis?

A) A firm with accounting standards consistent to other firms.

B) A firm with accounting standards different from other firms.

C) A service industry firm without significant fixed assets.

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Assuming consistent accounting standards across firms, P/B ratios can reveal signs of misvaluation across firms.