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Basic Question 1 of 8

The P/B multiple of a service company is usually ______ than that of a heavy equipment manufacturer.

A. higher.
B. lower.
C. the same as.
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User Contributed Comments 4

User Comment
katybo and the price?
danlan2 Price of a service company is similar to that of a heavy equipment manufacturer.
Rchan89 i think all else equal, a service company has less fixed assets they need to purchase than an auto manufacturer.
davidt876 i dont think it makes sense to comment on the price or book value in isolation. you can justify that the ratio of P/B is higher in the service industry than in manufacturing, but you can't say that P or B are absolutely higher or lower in any industry. even if you found that average book value is higher in an industry, its most likely a function of consolidation or the long-term lifecycle of the industry
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I am happy to say that I passed! Your study notes certainly helped prepare me for what was the most difficult exam I had ever taken.
Andrea Schildbach

Andrea Schildbach

Learning Outcome Statements

calculate and interpret alternative price multiples and dividend yield;

calculate and interpret underlying earnings, explain methods of normalizing earnings per share (EPS), and calculate normalized EPS;

explain and justify the use of earnings yield (E/P);

describe fundamental factors that influence alternative price multiples and dividend yield;

calculate and interpret the justified price-to-earnings ratio (P/E), price-to-book ratio (P/B), and price-to-sales ratio (P/S) for a stock, based on forecasted fundamentals;

calculate and interpret a predicted P/E, given a cross-sectional regression on fundamentals, and explain limitations to the cross-sectional regression methodology;

evaluate a stock by the method of comparables and explain the importance of fundamentals in using the method of comparables;

calculate and interpret the P/E-to-growth ratio (PEG) and explain its use in relative valuation;

calculate and explain the use of price multiples in determining terminal value in a multistage discounted cash flow (DCF) model;

explain alternative definitions of cash flow used in price and enterprise value (EV) multiples and describe limitations of each definition;

calculate and interpret EV multiples and evaluate the use of EV/EBITDA;

CFA® 2025 Level II Curriculum, Volume 4, Module 23.