Which of the following is NOT an advantage of using price-to-book value (PBV) multiples in stock valuation? A) Book values are very meaningful for firms in service industries. B) Book value provides a relatively stable, intuitive measure of value. C) PBV ratios can be compared across similar firms if accounting standards are consistent. D) Book value is often positive, even when earnings are negative Schweser says the correct answer is A. My issue with this question: CFAI clearly states in the text: “As a measure of net asset value per share, book value pr share has been viewed as appropriate for valuing companies composed chiefly of liquid assets, such as finance, investment, insurance and banking institutions.” I would classify banking, insurance and the others as Service companies. Which is why I didnt chose A. I chose C for the following reason also stated in the text. "P/B can be misleading as a valution indicator when significant differences exist among the level of assets used by companies under examination. Example: Dell used a Just-in-time model and generated its sales on a comparatively small base of assets. So Dell’s P/B is 14+ while AAPL, Gateway, and Compaq all have P/B values less than 2. Im furious with Schweser. I found three errors yesterday in Q-bank. Someone please tell me I am off on this one and I am missing something.
“The service-producing sector includes the divisions of (1) transportation, communications, and utilities; (2)wholesale trade; (3) retail trade; (4) finance, insurance, and real estate; (5) public administration; and (6) services.” I would say that book value is useful for the financial industry but not for the service industry as a whole (most definitely do not have highly liquid assets). Also, one could argue that Dell and Compaq are not “similar firms” because of their vastly different business model. What was Schweser’s explanation?
Schweser’s explanation: Book values are not very meaningful for firms in service industries.
That makes sense to me. Service industries are likely to have many intangible assets that are difficult to assign values to, making equity calculations subject to much ambiguity. I think the context of service industries in this question is trying to hint towards firms with low tangible assets, and with these types of firms, PBV can be quite meaningless. I would not consider human expertise in the service fields to be highly liquid.