Define the Price to Book Value Ratio. How can it be used in stock valuation.?

Explain briefly the Opportunity cost of capital. Which funds have opportunity cost of capital.

What are the handicaps of the Internal Rate of Return (IRR) Criterion?

 

1. The price to book value ratio considers the market price and book value of a firm. If price is 30 and book value is 10, the Price to book value ratio= 30/10=3. The market value of equity is generally higher than the book value. P/Book value ratios under 1 are considered as solid investments

2.Any firm can use funds in any new internal project. and get some return out of this internal project. The funds can be also used for investing in marketable securities. The opportunity cost is the difference between the return on two alternatives. Thus, we can also mention that the opportunity cost of capital is the incremental rate of returnthat a business foregoes when it uses funds for an internal project rather in marketable securities.

3. The use of IRR criteria is beneficial for comparing projects of similar size and scope.In IRR, cash flows are compared to the amount of capital outlay generating these cash flows' It does not account for the project size. Hence, comparing projects of different sizes on the basis of IRR is not feasable.