Under the value-to-book model a firm will be valued below book value when:
A) the ROCE is greater than RE
B) the ROCE is equal to RE
C) the ROCE is less than RE
D) the firm's growth rate is above the industry average

Question

Quizplus · Accepted Answer

Under the value-to-book model, a firm will be valued below book value when the ROCE is less than RE. This implies that the firm is not generating an adequate return on its capital which means that investors may not be willing to pay book value for the company. This often happens when a firm is in a declining industry or faces strong competition, resulting in lower profits and ROCE. Thus, option C is the best choice. Options A, B, and D are not relevant to the value-to-book model.

Under the Value-To-Book Model a Firm Will Be Valued Below