Question

A financial analyst engaged in business valuation obtained financial data on 71 drug companies. Let Y correspond to the​ price-to-book value​ ratio, X1 correspond to the return on​ equity, and X2 correspond to the growth percentage.

​Price/Book Value Ratio	Return on Equity	Growth​ %
1.514	12.873	6.491
8.305	11.881	135.561
2.116	12.421	0.113
6.591	25.166	14.148
1.254	8.742	22.781
3.304	38.046	19.121
2.519	25.631	24.558
5.196	19.655	11.695
2.294	22.793	49.968
7.717	69.706	36.709
0.391	3.719	40.989
2.572	9.182	28.896
7.552	29.156	52.059
5.195	17.699	25.052
2.124	29.206	23.847
4.791	31.405	9.486
2.228	14.854	18.414
4.061	11.919	39.077
1.845	14.244	39.464
1.516	14.014	27.051
2.027	14.841	13.193
5.018	20.666	17.285
2.366	14.925	15.968
2.155	5.638	16.719
3.013	11.306	8.277
1.747	16.233	18.404
5.605	23.959	16.798
4.635	14.723	46.518
2.489	6.173	34.036
1.692	19.128	8.596
8.354	39.045	15.031
2.149	15.235	25.116
2.806	19.678	0.214
7.424	18.484	3.273
3.213	20.759	9.623
2.714	34.785	7.135
2.489	15.565	9.415
1.258	10.361	4.786
2.995	23.603	4.126
10.171	91.599	13.298
1.996	1.598	15.929
1.673	9.357	5.731
2.042	19.406	0.013
7.149	4.944	102.655
1.208	42.673	1.494
5.767	90.778	74.005
6.406	19.481	8.935
2.663	27.292	34.455
3.451	13.064	12.143
6.869	24.691	11.603
13.576	81.932	24.515
4.133	1.518	20.217
7.237	3.629	22.281
6.162	31.531	49.763
1.089	5.155	13.173
9.308	47.796	61.224
1.232	13.419	10.847
0.951	36.085	9.027
3.783	28.706	71.167
3.505	18.006	51.808
2.106	14.072	16.969
10.127	133.101	171.334
4.264	21.816	8.591
8.547	11.255	247.668
2.003	17.234	10.697
4.054	19.354	6.395
2.263	8.472	24.491
2.996	18.623	14.267
4.564	21.592	5.842
4.941	49.432	31.322
2.259	19.325	3.944

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

B. . Develop a regression model to predict​ price-to-book-value ratio based on growth.

C. Develop a regression model to predict​ price-to-book-value ratio based on return on equity and growth.

D. Compute and interpret the adjusted r2 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?

Answer 1

(a) The regression model is:

Price/Book Value = 2.3354 + 0.0699*Return on Equity

Adjusted r2 = 0.330

(b) The regression model is:

Price/Book Value = 3.1288 + 0.0309*Growth

Adjusted r2 = 0.192

(c) The regression model is:

Price/Book Value = 1.9439 + 0.0599*Return on Equity + 0.0219*Growth

Adjusted r2 = 0.418

(d) The adjusted r2 for model 1 means that Adjusted R-squared adjusts the statistic based on Return on Equity.

The adjusted r2 for model 2 means that Adjusted R-squared adjusts the statistic based on Growth.

The adjusted r2 for model 3 means that Adjusted R-squared adjusts the statistic based on Return on Equity and Growth.

(e) The adjusted r2 for model 3 is the highest so it is the best predictor of​ price-to-book-value ratio.