CFA Level I · CFA Level I Exam · Relative Value Equity Valuation Approaches
Which statement about price to book value (P/B) is most accurate?
P/B is distorted when accounting standards differ across firms or when value comes mainly from intangible assets not on the balance sheet. It works best for asset-heavy firms such as banks and remains usable when earnings are negative.
- AIt is most meaningful for firms with large intangible assets.
- BIt is distorted when accounting standards differ across firms or assets are mainly intangible.Correct
- CIt cannot be used for firms with positive earnings.
Explanation
P/B can be used when earnings are negative and book value is positive, and suits asset-heavy firms such as banks. Its drawbacks include distortion from differing accounting choices and limited usefulness where intangible assets drive value. The other statements reverse these points.
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