“The Rule of 40”, a principle according to which software company’s combined “Revenue growth rate” and “Operating margin” should exceed 40%, has gained momentum as a high-level gauge of performance for software businesses. Increasingly, executives are embracing “the Rule of 40” as an important metric for building company’s valuation. To investigate the relationship between the company’s fulfilment of the “Rule of 40” and the company’s market capitalization, quarterly data was gathered for a software company (Ansys) in Worksheet 1.         Worksheet 1 Quarter ended date Rule of 40 (Revenue + Op Income, $M) Market Capitalization,  $M Mar-03 $125 $424 Jun-03 $132 $514 Sep-03 $143 $597 Dec-03 $153 $596 Mar-04 $163 $581 Jun-04 $170 $666 Sep-04 $175 $957 Dec-04 $184 $1 073 Mar-05 $194 $1 091 Jun-05 $203 $1 196 Sep-05 $213 $1 341 Dec-05 $221 $1 567 Mar-06 $235 $2 177 Jun-06 $277 $1 915 Sep-06 $329 $1 956 Dec-06 $391 $1 976 Mar-07 $453 $2 120 Jun-07 $491 $2 434 Sep-07 $520 $3 141 Dec-07 $555 $3 010 Mar-08 $588 $3 361 Jun-08 $621 $4 309 Sep-08 $673 $2 589 Dec-08 $727 $1 804 Mar-09 $743 $2 336 Jun-09 $761 $3 214 Sep-09 $767 $3 654 Dec-09 $782 $3 919 Mar-10 $807 $4 020 Jun-10 $831 $3 996 Sep-10 $846 $4 163 Dec-10 $867 $5 124 Mar-11 $902 $4 925 Jun-11 $941 $4 708 Sep-11 $1 000 $5 355 Dec-11 $1 053 $5 853 Mar-12 $1 098 $5 795 Jun-12 $1 146 $6 146 Sep-12 $1 180 $6 252 Dec-12 $1 212 $7 045 Mar-13 $1 226 $6 891 Jun-13 $1 253 $8 220 Sep-13 $1 271 $7 800 Dec-13 $1 289 $7 699 Mar-14 $1 312 $6 717 Jun-14 $1 336 $7 174 Sep-14 $1 371 $7 082 Dec-14 $1 393 $7 705 Mar-15 $1 396 $7 570 Jun-15 $1 398 $8 475 Sep-15 $1 397 $8 311 Dec-15 $1 393 $7 429 Mar-16 $1 402 $7 374 Jun-16 $1 417 $8 094 Sep-16 $1 432 $7 224 Dec-16 $1 453 $8 892 Mar-17 $1 493 $10 216 Jun-17 $1 524 $10 459 Sep-17 $1 567 $12 617 Dec-17 $1 607 $13 498 Mar-18 $1 647 $13 528 Jun-18 $1 710 $14 565 Sep-18 $1 720 $14 178 Dec-18 $1 921 $14 849 Mar-19 $1 968 $16 062 Jun-19 $2 052 $16 681 Sep-19 $2 125 $19 275   Test for a significant relationship at the 0.05 level of significance. Do you believe the estimated regression equation would provide a good prediction of the Market Capitalization? Use to support your answer. Provide an interpretation of the intercept (b0), and the slope (b1), in this problem.

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“The Rule of 40”, a principle according to which software company’s combined “Revenue growth rate” and “Operating margin” should exceed 40%, has gained momentum as a high-level gauge of performance for software businesses. Increasingly, executives are embracing “the Rule of 40” as an important metric for building company’s valuation. To investigate the relationship between the company’s fulfilment of the “Rule of 40” and the company’s market capitalization, quarterly data was gathered for a software company (Ansys) in Worksheet 1.        

Worksheet 1

Quarter ended date Rule of 40 (Revenue + Op Income, $M) Market Capitalization,  $M
Mar-03 $125 $424
Jun-03 $132 $514
Sep-03 $143 $597
Dec-03 $153 $596
Mar-04 $163 $581
Jun-04 $170 $666
Sep-04 $175 $957
Dec-04 $184 $1 073
Mar-05 $194 $1 091
Jun-05 $203 $1 196
Sep-05 $213 $1 341
Dec-05 $221 $1 567
Mar-06 $235 $2 177
Jun-06 $277 $1 915
Sep-06 $329 $1 956
Dec-06 $391 $1 976
Mar-07 $453 $2 120
Jun-07 $491 $2 434
Sep-07 $520 $3 141
Dec-07 $555 $3 010
Mar-08 $588 $3 361
Jun-08 $621 $4 309
Sep-08 $673 $2 589
Dec-08 $727 $1 804
Mar-09 $743 $2 336
Jun-09 $761 $3 214
Sep-09 $767 $3 654
Dec-09 $782 $3 919
Mar-10 $807 $4 020
Jun-10 $831 $3 996
Sep-10 $846 $4 163
Dec-10 $867 $5 124
Mar-11 $902 $4 925
Jun-11 $941 $4 708
Sep-11 $1 000 $5 355
Dec-11 $1 053 $5 853
Mar-12 $1 098 $5 795
Jun-12 $1 146 $6 146
Sep-12 $1 180 $6 252
Dec-12 $1 212 $7 045
Mar-13 $1 226 $6 891
Jun-13 $1 253 $8 220
Sep-13 $1 271 $7 800
Dec-13 $1 289 $7 699
Mar-14 $1 312 $6 717
Jun-14 $1 336 $7 174
Sep-14 $1 371 $7 082
Dec-14 $1 393 $7 705
Mar-15 $1 396 $7 570
Jun-15 $1 398 $8 475
Sep-15 $1 397 $8 311
Dec-15 $1 393 $7 429
Mar-16 $1 402 $7 374
Jun-16 $1 417 $8 094
Sep-16 $1 432 $7 224
Dec-16 $1 453 $8 892
Mar-17 $1 493 $10 216
Jun-17 $1 524 $10 459
Sep-17 $1 567 $12 617
Dec-17 $1 607 $13 498
Mar-18 $1 647 $13 528
Jun-18 $1 710 $14 565
Sep-18 $1 720 $14 178
Dec-18 $1 921 $14 849
Mar-19 $1 968 $16 062
Jun-19 $2 052 $16 681
Sep-19 $2 125 $19 275

 

Test for a significant relationship at the 0.05 level of significance.

Do you believe the estimated regression equation would provide a good prediction of the Market Capitalization? Use to support your answer.

Provide an interpretation of the intercept (b0), and the slope (b1), in this problem.

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