Chapter 14, Problem 11PS

A financial analyst engaged in business valuation obtained financial data on 60 drug companies (industry Group SIC 3 code: 283). The file BusinessValuation contains the following variables:

Company-Drug Company name

PB fye-Price-to-book-value ratio (fiscal year ending)

ROE-Return on equity

SGrowth-Growth (GS5)

a. Develop a regression model to predict price-to-book-value based on return on equity.

b. Develop a regression model to predict price-to-book-value based on growth.

c. Develop a regression model to predict price-to-book-value based on return on equity and

growth.

d. Compute and interpret the adjusted $r^2$ for each of the three models.

e. Which of these three models do you think is the best predictor of price-to-book value ratio?