A research analyst is trying to determine whether a firm’s price-earnings (P/E) and price-sales (P/S) ratios can explain the firm’s stock performance over the past year. A P/E ratio is calculated as a firm’s share price compared to the income or profit earned by the firm per share. Generally, a high P/E ratio suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E ratio. The P/S ratio is calculated by dividing a firm’s share price by the firm’s revenue per share for the trailing 12 months. In short, investors can use the P/S ratio to determine how much they are paying for a dollar of the firm’s sales rather than a dollar of its earnings (P/E ratio). In general, the lower the P/S ratio, the more attractive the investment. The accompanying table shows the year-to-date (YTD) returns and the P/E and P/S ratios for a portion of the 30 firms included in the Dow Jones Industrial Average. https://view.officeapps.live.com/op/view.aspx?src=https%3A%2F%2Fezto-cf-media.mheducation.com%2FMedia%2FConnect_Production%2Fbne%2FJaggia_4e%2Fusing_r%2Fexcel_data_file%2Fch14%2FAlgo%2Fq62%2FCh14_Q62_V13_Data_File.xlsx&wdOrigin=BROWSELINK (Link to data) a-1: Estimate: Returtn= Estimate: Return = β0 + β1P/E + β2 P/S + ε. (Negative values should be indicated by a minus sign. Round your answers to 4 decimal places.) Predicted Return= _______ + _______ PE + ______ PS a-2: Are the signs on the coefficients as expected? Yes or no? (Simple question) b: Interpret the slope coefficient of the PS ratio. (Choose option 1-4) 1) As the PS ratio increases by 1 unit, the predicted return of the firm decreases by 3.37%, holding PE constant. 2) As the PS ratio increases by 1 unit, the predicted return of the firm decreases by 4.39%, holding PE constant. 3) As the PS ratio increases by 1 unit, the predicted return of the firm increase by 3.37%, holding PE constant. 4) As the PS ratio decreases by 1 unit, the predicted return of the firm decreases by 5.37%, holding PE constant. c: What is the predicted return for a firm with a PE ratio of 10 and a PS ratio of 2? (Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.) d: What is the standard error of the estimate? (Round your answer to 2 decimal places) e: Interpret R^2 (Choose option 1 - 4) 1. 40.46% of the sample variation in y is explained by the sample regression equation. 2. 40.46% of the sample variation in x is explained by the sample regression equation. 3. 63.61% of the sample variation in x is explained by the sample regression equation. 4. 36.05% of the sample variation in y is explained by the sample regression equation.
A research analyst is trying to determine whether a firm’s price-earnings (P/E) and price-sales (P/S) ratios can explain the firm’s stock performance over the past year. A P/E ratio is calculated as a firm’s share price compared to the income or profit earned by the firm per share. Generally, a high P/E ratio suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E ratio. The P/S ratio is calculated by dividing a firm’s share price by the firm’s revenue per share for the trailing 12 months. In short, investors can use the P/S ratio to determine how much they are paying for a dollar of the firm’s sales rather than a dollar of its earnings (P/E ratio). In general, the lower the P/S ratio, the more attractive the investment. The accompanying table shows the year-to-date (YTD) returns and the P/E and P/S ratios for a portion of the 30 firms included in the Dow Jones Industrial Average.
https://view.officeapps.live.com/op/view.aspx?src=https%3A%2F%2Fezto-cf-media.mheducation.com%2FMedia%2FConnect_Production%2Fbne%2FJaggia_4e%2Fusing_r%2Fexcel_data_file%2Fch14%2FAlgo%2Fq62%2FCh14_Q62_V13_Data_File.xlsx&wdOrigin=BROWSELINK (Link to data)
a-1: Estimate: Returtn= Estimate: Return = β0 + β1P/E + β2 P/S + ε. (Negative values should be indicated by a minus sign. Round your answers to 4 decimal places.)
Predicted Return= _______ + _______ PE + ______ PS
a-2: Are the signs on the coefficients as expected?
Yes or no? (Simple question)
b: Interpret the slope coefficient of the PS ratio. (Choose option 1-4)
1) As the PS ratio increases by 1 unit, the predicted return of the firm decreases by 3.37%, holding PE constant.
2) As the PS ratio increases by 1 unit, the predicted return of the firm decreases by 4.39%, holding PE constant.
3) As the PS ratio increases by 1 unit, the predicted return of the firm increase by 3.37%, holding PE constant.
4) As the PS ratio decreases by 1 unit, the predicted return of the firm decreases by 5.37%, holding PE constant.
c: What is the predicted return for a firm with a PE ratio of 10 and a PS ratio of 2? (Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.)
d: What is the standard error of the estimate? (Round your answer to 2 decimal places)
e: Interpret R^2 (Choose option 1 - 4)
1. 40.46% of the sample variation in y is explained by the sample regression equation.
2. 40.46% of the sample variation in x is explained by the sample regression equation.
3. 63.61% of the sample variation in x is explained by the sample regression equation.
4. 36.05% of the sample variation in y is explained by the sample regression equation.
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