Price Multiples - P/BV

Question 1

What is the P/BV

Answer 1

P/BV is the stock price per BV of equity

Question 2

What is the Book Value of Equity

Answer 2

Assets - Liabilities

Question 3

What are benefits of using BV

Answer 3

1. BV is usually more stable
   2.BV essentially means net assets per share, which is especially accurate for corporates that hold liquid assets (e.g. banks, insurers, financial firms)

Question 4

Which type of companies can use BV

Answer 4

Typically a going concern due to the fact that BV is measured at historical cost typically

Question 5

What are the drawbacks to book value

Answer 5

1. Doesnt recognise all assets e.g. trademarks, reputation
2. Misleading if different companies have different business moderls e.g. lease/hold or fixed assets
3. BV can be impacted by accounting estimationns
4. BV is based on rreported values which may be different to the actual market value
5. Share repurchases can distort book value

Question 6

How do you calculate BV?

Answer 6

Shareholders equity - Total value of claims which are senior to common stock / no of share outstanding

Question 7

What is tangible BV per share

Answer 7

Adjustments for significant off balance sheet liabilities

Question 8

How can you derive P/B ratio using fundamentals

Answer 8

Vo = D1 / (r-g)

(divide by BV)

Vo/BV = Earnings * 1-retention rate / (r-g)

retention rate = g/ROE

Vo = E1 x (1-g/ROE) / (r-g)

Justified P/B = Roe - g / r-g

Essentially how much a company earns on it’s equity relative to what investors require