Which of the following most accurately describes a potential drawback to using price/book value? a. Book value includes estimates for human capital, which are subjective. b. Book value measures historic cost. c. Book values per share can not be calculated for most companies. d. Book values can be positive, even when earnings are negative.
I’ll go with A
b - a building with a market value of $20Million dollars that has a BV of $200,000 will significantly distort P/BV
B is correct, and Char-lee’s example is exactly it.
B - Just take a look at the book values in the Financial sector. Anyone actually believe they are buying near book value with some of the sketchy assets on the books?
A is incorrect b/c BV does not measure human capital. That is why it is good for banks, etc. b/c assets have a more current value.
I would think B. I dont have my CFAI txt with me to look this up.
The answer is B, historical cost is a draback for P/BV.
B maybe, because a company may be worth more than the assets on its balance sheet. I am thinking about things like LAND, which gets marked at HISTORICAL but appreciates over time, usually. So B D got me, but I don’t think that is it
why is it not D so?!
D is true, it is NOT a drawback.