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Valuation: Measuring and Managing the Value of Companies, Fifth Edition
Chapter 15 Solutions
Market Value Tracks Return on Invested Capital and Growth
1. The 6.5 percent return is based on the following assumptions: (1) corporate profits
continue to grow at 3 to 3.5 percent per year, and (2) the average price-to-earnings ratio is
2. Inflation is important because of its role in the cost of capital. Higher inflation increases
3. The relationship is less pronounced for the earnings multiple because that ratio is equal to
4. When earnings growth is low, the market-value-to-earnings multiples are not very useful
5. Based on the regression results in Exhibit 15.10, the coefficient on P/E changes over the
longer period of 10 years is not significant; thus, we cannot rule out the hypothesis that
6. The key issue is to use the TRS-based compensation over the long term. Over the long
7. Clearly, bonds play a role in a portfolio based on risk tolerance and horizon. If an investor
wishes to preserve value for a near-term purchase or event, then bonds should have a
8. TRS is driven by ROIC and growth and not by accounting measures (e.g., fundamentals).
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