Reference no: EM132144456

You are looking at price-to-book ratios as an alternative to price-to-earnings ratios. Three of the advantages of P/B ratios that your assistant gives are:

Advantage 1: Because book value is a cumulative balance sheet account encompassing several years, book value is more likely to be positive than EPS.

Advantage 2: For many companies, especially service companies, human capital is more important than physical capital as an operating asset.

Advantage 3: Book value represents the historical purchase cost of assets, as well as accumulated accounting depreciation expenses. Inflation and technological changes can drive a wedge between the book value and market value of assets.

Which one of the three advantages most likely represents a good reason to consider using a P/B ratio?

• Advantage 1
• Advantage 2
• Advantage 3
• None of them