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Chapter 4. Less Than Book Value? What A ... > Theoretical Roots: Price to Book Rat...

Theoretical Roots: Price to Book Ratios and Fundamentals

In Chapter 3, you examined the variables that affect the price-earnings ratio by going back to a simple valuation model and deriving the determinants of the multiple. You will follow the same path with price-to-book ratios. You will begin again with the definition of the price-to-book ratio (and any variants thereof) and then evaluate the variables that may cause some companies to have high price-to-book ratios and others to have low price-to-book ratios.

Defining the Price-to-Book Ratio

The price-to-book ratio is the ratio obtained by dividing the market price per share by the book value of equity per share at a point in time.


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