Question #108
Reading: Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples
PDF File: Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples.pdf
Page: 37
Status: Unattempted
Correct Answer: B
Question
Which of the following is a disadvantage of using the price-to-book value (PBV) ratio?
Answer Choices:
A. Book values are affected by accounting standards, which may vary across firms and countries
B. Firms with negative earnings cannot be evaluated with the PBV ratios
C. Book value may not mean much for manufacturing firms with significant fixed costs
Explanation
The disadvantages of using PBV ratios are:
1. Book values are affected by accounting standards, which may vary across firms and
countries.
2. Book value may not mean much for service firms without significant fixed costs.
3. Book value of equity can be made negative by a series of negative earnings, which
limits the usefulness of the variable.