You are analyzing the price-book value ratios for firms in the trucking industry, relative to returns...

 

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You are analyzing the price-book value ratios for firms in the trucking industry, relative to returns on equity and required rates of return. The data on the companies is as follows: PBV Сompany Builders Transport ROE Beta 2.0 11.5% 1.00 Carolina Freight Consolidated Freight 0.6 5.5% 1.20 2.6 12.0% 1.15 J.B. Hunt 2.5 14.5% 1.00 M.S. Carriers 2.5 12.5% 1.15 Roadway Services 3.0 14.0% 1.15 Ryder System Xtra Corporation 2.3 13.0% 1.05 2.8 16.5% 1.10 The Treasury bond rate is 7%, and the market risk premium is 5.5%. When do we expect to find a PBV greater than one, and when do we expect a PBV less than one? Compute the required return on each stock and comment on which firms, if any, appear mispriced based on this rule. b. Compute the average PBV ratio, ROE, and beta for the industry. Based on averages, find the industry excess return. Is the industry under- or overvalued relative to book value? c. Regress PBV on ROE and beta. What do you get for a regression R ? Use the regression estimates to compute a predicted PBV for each firm. Based on the regression estimates, now which firms appear under- or overvalued? You are analyzing the price-book value ratios for firms in the trucking industry, relative to returns on equity and required rates of return. The data on the companies is as follows: PBV Сompany Builders Transport ROE Beta 2.0 11.5% 1.00 Carolina Freight Consolidated Freight 0.6 5.5% 1.20 2.6 12.0% 1.15 J.B. Hunt 2.5 14.5% 1.00 M.S. Carriers 2.5 12.5% 1.15 Roadway Services 3.0 14.0% 1.15 Ryder System Xtra Corporation 2.3 13.0% 1.05 2.8 16.5% 1.10 The Treasury bond rate is 7%, and the market risk premium is 5.5%. When do we expect to find a PBV greater than one, and when do we expect a PBV less than one? Compute the required return on each stock and comment on which firms, if any, appear mispriced based on this rule. b. Compute the average PBV ratio, ROE, and beta for the industry. Based on averages, find the industry excess return. Is the industry under- or overvalued relative to book value? c. Regress PBV on ROE and beta. What do you get for a regression R ? Use the regression estimates to compute a predicted PBV for each firm. Based on the regression estimates, now which firms appear under- or overvalued?

Answer rating: 100% (QA)

ANSWERS a We expect firms with higher ROE and beta to have a PBV greater than one and firms with low... View the full answer