Question Time

C

CFAHouston

New member
Joined
Jun 18, 2026
Messages
0
Reaction score
0
Which of the following statements about price multiples is FALSE?

A. Cash flow figures are typically more stable than earnings figures

B. Price to book value rations and price to cash flow ratios should be used in conjunction with price to earnings ratios in fundamental analysis

C. firms with low p/bv ratios tend to outperform high p/bv ratios on a risk adjusted basis

D. Firms with low p/bv ratios tend to under-perform high p/bv ratio firm on a risk adjusted basis.
 
Why D? Given that the equity with low p/bv means the cheaper than with high p/bv, i am thinking that correct is C. Is there wrong with me?
 
It's asking which one is false and typically, as pointed out a firms with low Price to Book value (per share) tend to out perform higher ones because they are more undervalued. Also academic tests have shown firms that have greater book/market values (on an overall firm basis), will tend to outperform other ones; which is the inverse of the aforementioned ratio. The logic is that when the market assigns less value to firm it will have a lower price/book (and just as a note, book value, to begin with is, from an economic perspective, an undervaluation of a firm, unless it's a finance company). So accordingly, overtime a stock will rise to it's intrinsic value; hence D.
 
You must log in or register to reply here.
Back
Top