Assume that you have done a regression of PBV ratios for all firms on the New York Stock Exchange, and arrived at the following result:

where Payout = Dividend payout ratio during most recent period Growth = Projected growth rate in earnings over next five years Beta = Beta of the stock in most current period To illustrate, a firm with a payout ratio of 40%, a beta of 1.25, a ROE of 25%, and expected growth rate of 15% would have had a price–book value ratio of:

a. What use, if any, would you put the R-squared of the regression to?

b. Assume that you have also run a sector regression on a company and estimated a price-to-book ratio based on that regression. Why might your result from the market regression yield a different result from the sector regression?

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PBV = 0.88 +0.82 Payout + 7.79 Growth - 0.41 Beta + 13.81 ROE R2 = 0.65