Chapter 15, Problem 37PS

Financial analysts engage in business valuation to determine a company’s value. A standard approach uses the multiple of earnings method: You multiply a company’s profits by a certain value (average or median) to arrive at a final value. More recently, regression analysis has been demonstrated to consistently deliver more accurate predictions. A valuator has been given the assignment of valuing a drug company. He obtained financial data on 72 drug companies (Industry Group Standard Industrial Classification [SIC] 3 code 283), which included pharmaceutical preparation firms (SIC 4 code 2834), in vitro and in vivo diagnostic substances firms (SIC 4 code 2835), and biological products firms (SIC 4 2836). The file BusinessVeluation2 contains the following variables:

COMPANY-Drug company name

TS-Ticker symbol

SIC 3-Standard Industrial Classification 3 code (industry group identifier)

SIC 4-Standard Industrial Classification 4 code (industry identifier)

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

PE fye-Price-to-earnings ratio (fiscal year ending)

NL Assets-Natural log of assets (as a measure of size)

ROE-Return on equity

SGROWTH-Growth (GSS)

DEBT/EBITDA-Ratio of debt to earnings before interest, taxes, depreciation, and amortization

D2834-Dummy variable indicator of SIC 4 code 2834 (1 if 2834, 0 if not)

D2835-Dummy variable indicator of SIC 4 code 2835 (1 if 2835, 0 if not)

Develop the most appropriate multiple regression model to predict the price-to-book value ratio. Be sure to perform a thorough residual and influence analysis. In addition, provide a detailed explanation of your results.