Relating market value to book value of shareholders' equity. Firms prepare their balance sheets using GAAP for the recognition and valuation of assets and liabilities. Accountants refer to the total common shareholders' equity appearing 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 shareholders' 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 GAAP in measuring assets and liabilities, which net to the book value of shareholders' equity.
Exhibit 2.16 presents balance sheet information for five firms 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 percent ownership in a large number of its bottlers.
(2) Bristol-Myers Squibb (Bristol): Bristol generates approximately 75 percent of its revenues from prescription drugs and medical devices and 25 percent 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 2.16) 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 forest lands of any nongovernmental entity in the United States. It processes timber into wood products for the construction industry and 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 GAAP for assets and liabilities, which this chapter discussed. Identify the GAAP 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 five firms.

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EXHIBIT 2.16 Balance Sheets for Selected Companies (all dollar amounts in millions) (Problem 39) ASSETS Cash and Marketable Securities Accounts and Notes Receivable Inventories Other Current Assets Total Current Assets Investments in Securities Property. Plant, and Equipment Other Noncurrent Assets Total Assets LIABILITIES AND SHAREHOLDERS' EQUITY Accounts Payable Short-term Borrowing Other Current Liabilities Total Current Liabilities Long-term Debt Other Noncurrent Liabilities Total Liabilities Preferred Stock Common Stock Retained Earnings Treasury Stock Total Shareholders' Equity Total Liabilities and Shareholders' Equity ....... Market Value/Book Value Ratio Coca-Cola Bristol-Myers Squibb Bankers Trust International Paper Walt Disney $ 1,531 1,525 $ 2,423 1,047 1,102 2,043 1,397 847 $79,048 11,249 $ 270 $ 1,510 2,241 2,075 1,671 2,264 244 $ 5,205 $ 6,710 $90,297 $ 4,830 $ 5,445 3,928 1.032 630 4,080 3,666 915 9.941 5,814 660 2,534 5,804 2,033 937 $13,873 $12,910 $97,016 $17,836 $12.826 $ 2,564 $ 2,083 1,530 693 725 2,856 $24,939 55,166 5,502 $ 1,204 2,083 747 $ 2,475 $ 6,177 $ 4,274 $85,607 $ 4,034 1,426 1,035 644 2,288 6,455 4,464 2,824 967 $ 3,442 2,937 939 $ 8,638 $ 7,206 - S 1,600 10,708 $ 451 (7,073) 7,299 (2,046) $92,062 $ 645 1,401 3,324 $11,322 $ 7,318 $ 1,914 (416) 4,711 (111) $ 5,235 $ 5,704 $ 4,954 $ 6,514 $13,873 12.6 $12,910 5.2 $97,016 $17,836 $ 945 5,849 (1,286) $ 5,508 $12,826 1.0 1.3 4.4