The price-earnings ratio (P E ratio) is a commonly used measure of how over-priced or underpriced a company’s stock is. There are a number of different statistics about a company’s stock is. One of these statistics is a measure of future growth. To examine the relationship between Pes and the measure of future growth (FG), you run a simple regression and get the equation PE = 3 + .9FG. The R2 for this model is 18% and the standard error is 5. Another model was run using a measure of dividends (D) to explain the PE. This gives the equation PE = 1.6 + 13.2D. a) Give a managerial interpretation for the coefficients 3 and 9. b) A particular company has a value of 15 on the measure of future growth. Its PE ratio is 4.5. What would you conclude about the company’s PE? Briefly explain. c) Since 13.2 is greater than .9, can you conclude the PE ratio has a stronger relationship to dividends than future growth? If not, what would you need to know to conclude which variable has a stronger relationship to the PE ratio? Briefly explain.
Correlation
Correlation defines a relationship between two independent variables. It tells the degree to which variables move in relation to each other. When two sets of data are related to each other, there is a correlation between them.
Linear Correlation
A correlation is used to determine the relationships between numerical and categorical variables. In other words, it is an indicator of how things are connected to one another. The correlation analysis is the study of how variables are related.
Regression Analysis
Regression analysis is a statistical method in which it estimates the relationship between a dependent variable and one or more independent variable. In simple terms dependent variable is called as outcome variable and independent variable is called as predictors. Regression analysis is one of the methods to find the trends in data. The independent variable used in Regression analysis is named Predictor variable. It offers data of an associated dependent variable regarding a particular outcome.
The price-earnings ratio (P E ratio) is a commonly used measure of how over-priced or underpriced a company’s stock is. There are a number of different statistics about a company’s stock is. One of these statistics is a measure of future growth. To examine the relationship between Pes and the measure of future growth (FG), you run a simple regression and get the equation
PE = 3 + .9FG.
The R2 for this model is 18% and the standard error is 5. Another model was run using a measure of dividends (D) to explain the PE. This gives the equation
PE = 1.6 + 13.2D.
a) Give a managerial interpretation for the coefficients 3 and 9.
b) A particular company has a value of 15 on the measure of future growth. Its PE ratio is 4.5. What would you conclude about the company’s PE? Briefly explain.
c) Since 13.2 is greater than .9, can you conclude the PE ratio has a stronger relationship to dividends than future growth? If not, what would you need to know to conclude which variable has a stronger relationship to the PE ratio? Briefly explain.
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