Under the value-to-book model a firm in steady state equilibrium earning ROCE = R_E will: A) create additional shareholder wealth and be valued above book value. B) maintain shareholder wealth and be valued at book value. C) destroy shareholder wealth and be valued below book value. D) be in a no-growth state.

Question

Quizplus · Accepted Answer

In steady state equilibrium, the firm is earning a return on capital employed (ROCE) that is equal to the required rate of return adjusted for growth (R_E). This means that the firm is generating just enough return to maintain the current level of shareholder wealth, and there is no growth potential. Therefore, the firm will be valued at book value according to the value-to-book model.

Under the Value-To-Book Model a Firm in Steady State Equilibrium