I came across this question in the Boston Mock (known for errors from time to time), and I wanted double check with the forum. It is essentially saying that even though the Justified P/B is higher than the actual P/B, the stock is fairly-valued because the product of its current Book Value and actual P/B is very close to the actual stock price. Is this something we should be in the habit of doing, i.e. checking if the actual price multiple aligns with the current stock price? My guess would be it aligns all the time…since it uses that same price to calculate it lol. (the justified P/B = 1.14, the actual P/B = 1.075)
B LOS: Study Session 11-32-h When the justified P/B is larger/smaller than the actual P/B, the stock may be under/overvalued. However, since the estimate of absolute fair value of the stock (Book Value per Share * P/B = 14.57 * 1.075 = $15.66) is materially the same as the current stock price ($15.65), the stock seems to be fairly-valued. Reference: Reading 32, Market-Based Valuation: Price and Enterprise Value Multiples, Section 3.2.
where did you get that example? either way, if justified P/B and actual P/B are very close then yes, you can suggest that the stock is fairly valued (up to subjectivities). but don’t worry, CFAI never leaves anything up for interpretation for the exam.
For example: I remember a question from the mock exam where the vignette states that the company an analyst is working for has a policy for what is fairly valued, overvalued or undervalued (for example, the firm may suggests 1% difference is not significant enough to suggest a stock is cheap/expensive). These kinds of policies/constraints will surely be given for the real exam and you should adhere to these.
If these are not given, you should always say that it’s overvalued (if justified p/b is smaller than actual p/b)