What is one drawback of using book value for valuation?

The correct choice points out a significant limitation of using book value for valuation, which is that it relies exclusively on historical costs. Book value represents the value of an asset as recorded on the company's balance sheet, based on the original purchase price minus depreciation. This method does not take into account the current market value of the assets or any potential appreciation that may have occurred over time.

This can lead to an inaccurate picture of a company's financial health or asset value, especially in circumstances where the market conditions have shifted dramatically since the assets were acquired. While historical costs provide a reliable baseline, they fail to reflect changes in the economic environment or the current value that could be derived from the assets if they were sold. Thus, using book value alone can mislead investors and stakeholders looking for a clear and updated view of a company's worth.