Chartered Financial Analyst (CFA) Level 1 Practice Exam

What does the Price to Book Value (P/BV) ratio represent?

1. Price per share / Book value per share

2. Net Income / Book value per share

3. Price per share / Net Income

4. Book value per share / Total Assets

The correct answer is: Price per share / Book value per share

The Price to Book Value (P/BV) ratio is a key financial metric that helps investors understand how much they are paying for each dollar of a company's book value. It is calculated by taking the price per share of the company's stock and dividing it by the book value per share. The book value per share represents the equity available to shareholders divided by the number of outstanding shares. Thus, the P/BV ratio provides insight into how the market values the equity of the company compared to its actual book value. A P/BV ratio less than 1 may indicate that the stock is undervalued relative to its book value, while a ratio above 1 may suggest that the stock is overvalued or that the market expects growth. Other options do not accurately reflect the relationship that the P/BV ratio encapsulates. For instance, net income over book value per share does not provide the same insight into market valuation, nor does dividing the price per share by net income relate to the accounting measure of book value. Lastly, the ratio of book value per share to total assets is a different measure that assesses the equity position rather than the market's valuation of that equity. Therefore, the proper understanding of the P/BV ratio lies in the