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 of 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. She obtained financial data on 60 drug companies (Industry Group Industrial Classification {SIC}3 code 283), Which included pharmaceutical preparation firms (SIC 4 code 2534), in vitro and in vivo diagnostic substance firms (SIC 4 code 2835), and biological products, and biological products firms (SIC 4 2836). The file BusinessValution2 contains these variables:

COMPANY-Drug company name

TS-Ticker symbol

SIC3-Standard industrial Classification 3 codes (industry group identifier)

SIC4-Standard industrial Classification 4 codes (industry identifier)

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

PB fye-price-to-earning ratio (fiscal year ending)

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

ROE-Return on equity

SGROWTH-Growth (GS5)

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

D2834-Dummy variable indicator of SIC 4 code 2534 (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. Perform a through residual analysis and provide a detailed explanation of your results.