Question: The price-earnings ratio (PE ratio) for a stock is a commonly used measure of how over-priced a company’s stock is. There are a number of different statistics about a company that are available that might explain why this ration differs for different companies. 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 R ² 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.

1. Give a managerial interpretation for the coefficients 3 and .9
2. A particular company has a value of 15 on the measure of future growth. Its PE is 4.5. What would you conclude about this company’s PE? Briefly explain.
3. Since 13.2 is greater than .9, can you conclude that if it increase its dividends 0.1, its PE is expected to increase by 1.32. Is this a sensible interpretation? Briefly explain.
4. A company looking at this equation, concludes that if it increases its dividends 0.1, its PR is expected to increase by 1.32. Is this a sensible interpretation? Briefly explain.
5. A set of industries was identified as high growth (HG industries). To examine the relationship between the PE ratio and whether or not the company comes froma high growth industry, the following model was developed (where HG=1 if the company is from a high growth industry and 0 otherwise):

PE=7.8+23.2HG.

Give a managerial interpretation for the coefficients 7.8 and 23.2

Price: $2.99

Solution: The downloadable solution consists of 2 pages
Deliverable: Word Document