“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
“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 |
Develop a scatter plot with “Rule of 40” metric on the horizontal axis and “Market Capitalization” on the vertical axis.
What does the
Develop the estimated regression equation that could be used to predict the company’s Market Capitalization (show Excel regression output).
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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