Relating market value to book value of shareholders' equity Firms prepare their balance sheets by applying authoritative guidance for the recognition and measurement of assets and liabilities. Accountants refer to the total common sharehokkrs' equity on the balance sheet as the book value of shareholders' equity. The market value of shareholders' equity equals the number of shares of common stock outstanding times the market price per share. Financial analysts frequently examine the ratio of the market value of sharehokkrs' equity to the book value of shareholders' equity, referred to as the market-to-book-value ratio, in assessing current market prices. Theoretical and empirical research suggests that the size of the market-to-book-value ratio is related to (1) a firm's ability to generate higher rates of profitability than its competitors, (2) its rate of growth, and (3) its use of authoritative guidance in measuring assets and liabilities, which net to the book value of shareholders' equity. Exhibit 3.8 presents balance sheet information for five firms that report using U.S. GAAP at the end of a recent year. It also shows their market-to-book-value ratios. Additional information regarding the five companies follows:

(1) Coca-Cola (Coke): Coke markets soft drinks worldwide. It has grown primarily by internal expansion rather than by acquiring other soft-drink firms. Coke maintains less than 50% ownership in a large number of its bottlers.

(2) Bristol-Myers Squibb (Bristol): Bristol generates approximately 75% of its revenues from prescription drugs and medical devices and 25% from nonprescription health products, toiletries, and beauty aids.

(3) Bankers Trust (Bankers): Bankers obtains funds primarily from depositors (reported on the Accounts Payable line in Exhibit 3.8) and invests them in short-term Liquid assets or lends them to businesses and consumers. It also engages in investment activities on its own account.

(4) International Paper (IP): IP has the largest holdings of forestlands of any nongovernmental entity in the United States. It processes timber into wood products for the construction industry arid processes pulp from the timber into various types of commodity and specialty papers.

(5) Walt Disney (Disney): Disney produces motion picture films and operates theme parks.

a. The market-to-book-value ratios differ from 1.0 in part because the rates of profitability and growth of these five firms differ from those of their competitors. This problem does not provide you with sufficient information to assess the impact of these two factors on the market-to-book-value ratio. The ratios also differ from 1.0 because of the use of U.S. GAAP for assets and liabilities, which this chapter discussed. Identify the U.S. GAAP requirements that most likely explain the market-to-book-value ratios for each of the five firms (that is, identify which accounting principles cause the book values of assets and liabilities to differ from the market value of shareholders' equity).

b. Discuss the likely rationale for the nature and mix of assets and the nature and mix of financing for each of the fivefirms.

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Balance Sheet for Selected Companies EXHIBIT 3.8 (all dollar amounts in millions) (Problem 34) Bristol-Myers Squibb Bankers International Walt Coca-Cola Trust Paper Disney ASSETS $ 1,531 $ 2,423 $ 270 $ 1,510 Cash and Marketable Securities $79,048 11,249 Accounts and Notes Receivable. 1,525 2,043 2,241 1,671 Inventories.. 1,047 1,397 2,075 2,264 Other Current Assets 1,102 847 244 $ 5,205 $ 6,710 Total Current Assets. $ 4,830 $ 5,445 $90,297 Investments in Securities 3,928 1,032 630 Property. Plant, and Equipment 4,080 3,666 915 9,941 5,814 Other Noncurrent Assets 660 2,534 5,804 2,033 937 Total Assets ... $13,873 $12,910 $97,016 $12,826 $17,836 LIABILITIES AND SHAREHOLDERS" EQUITY $ 1,204 $ 2,475 Accounts Payable Short-Term Barrowing Other Current Liabilities $ 2,564 $ 693 $24,939 2,083 725 55,166 2,083 1,530 2,856 5,502 747 967 $ 6,177 $ 4,034 Total Current Liabilities $ 4,274 $ 3,442 $85,507 Long-Term Debt 6,455 4,454 1,426 644 2,937 Other Noncurrent Liabilities 1,035 $ 8,638 2,288 939 2,824 S 7,206 $ 7,318 Tetal Liabilities $92,062 $11,322 Preferred Stock 645 Common Stock. Retained Earnings Treasury Stock, Total Shareholders' Equity $ 1,600 $ 1,914 $ 451 1,401 945 10,708 7,299 3,324 4,711 5,849 (2,046) $ 5,704 (416) $ 4,954 (7,073) $ 5,235 (111) $ 6,514 (1,286) $ 5,508 Total Liabitities and Shareholders' Equity $13,873 $97,016 $17,836 $12,826 $12,910 Market Value/Book Value Ratio 12.6 5.2 1.0 1.3 4.4