P/B Ratio Models
One price ratio model covered by the Level I CFA® exam curriculum is the __price-to-book (P/B) ratio__. This ratio is calculated by taking the current stock price of a company and dividing by the book value per share.
Good work!
This is the P/B for TT. You can find P/B by taking the stock price of $10 and dividing by the book value per share. You need to do a bit of work to find the book value per share by:
$$\displaystyle Book Value Per Share = \$1,000,000/500,000=2$$
Then, you find P/B by:
$$\displaystyle P/B = \$10/2=5$$
Incorrect.
This is not the P/B for TT. Remember that stock price must be scaled by book value per share.
Incorrect.
This is not the P/B for TT. Remember that book value per share is needed to find P/B.
How would you interpret the P/B ratio of 5 for TT?
Incorrect.
The market is not paying the book value per share for TT. If the market were paying exactly the book value per share, then the P/B ratio would be 1 and in this case it is 5.
A P/B of 5 means that the market is paying $5 for every $1 of book value per share. Generally, lower P/B ratios are associated with value stocks, and all else equal the less the market is paying for a $1 of book value per share, the lower valued it is and the more likely to be a bargain it is.
Yes!
A P/B of 5 means that the market is paying $5 for every $1 of book value per share. Generally, lower P/B ratios are associated with value stocks, and all else equal the less the market is paying for a $1 of book value per share, the lower valued it is and the more likely to be a bargain it is.
In summary:
[[summary]]
Suppose that you are valuing a company, Tallahassee Timber (TT), and you know that the current stock price for TT is $10 per share, the book value is $1,000,000, and there are currently 500,000 shares outstanding. What is the P/B ratio for TT?
The market is currently paying exactly the book value per share of TT
The market is currently paying $5 for every $1 of book value per share
5
10
20
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