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

Question

Quizplus · Accepted Answer

The value-to-book model values a firm based on its return on capital employed (ROCE) in relation to the cost of capital (R_E). If the ROCE is less than the cost of capital, it suggests that the firm is not generating enough return to cover its cost of financing, which can lead to a decrease in book value. Therefore, the firm will be valued below book value. Options A, B, and D are not directly related to the value-to-book model.

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