In July 2010, financial analysts regressed the price to book ratios against the fundamentals identified in the preceding section—the return to equity, the payout ratio, the beta, and the expected earnings growth rate over the next five years (from analyst forecasts).

PBV = 1.09 + 8.93 ROE + .809 Payout ratio + .917 Beta + 7.55 expected growth rate

The regression has an R-squared of 43.2 % Assume that you had been asked to value a private firm early in 2011 and that you had the following data on company:

Book value of equity $ 100 million

Net income in 2010 20 million

Dividend paid 8 million

Beta based on comparable firms 1.25

Assume also that the firm reinvested $ 12 million in 2010and earnings are expected to grow 25% a year to the next five years.

a) Calculate the independent variables in the desired unit. 

b) Compute the predicted price-book ratios and market value of firm. 

c) Interpret the R- squared of this regression.