Exhibit 14 12 presents data from a recent year on market

to book #4780
Exhibit 14.12 presents data from a recent year on market-to-book ratios, ROCE, the cost of
equity capital, and price-earnings ratios for seven pharmaceutical companies. (Note that price-
earnings ratios for these firms typically fall in the 30-35 range.) Exhibit 14.12 also provides
historical data on the five-year average rate of growth in earnings and dividend payout ratios for
each firm. The data on excess earnings years represent the number of years that each firm
would need to earn a rate of return on common shareholders' equity (ROCE) equal to that in
Exhibit 14.12 in order to produce value-to-book ratios that equal the market-to-book ratios
shown. For example, Bristol-Myers Squibb would need to earn an ROCE of 48.9 percent for
58.3 years in order for the present value of the excess earnings over the cost of equity capital to
produce a value-to-book ratio that matches the market-to-book ratio of 13.9.RequiredAssume
that market share prices for each firm are reasonably efficient (that is, do not simply assume
that the market has overvalued or undervalued these firms). Considering the theoretical
determinants of the market-to-book ratio, discuss the likely reasons for the relative ordering of
these seven companies on their market-to-book ratios.View Solution:
Exhibit 14 12 presents data from a recent year on market to book

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