Question
A research analyst is trying to determine whether a firm's price-earnings (PE) and price-sales (PS) ratios can explain the firm's stock performance over the past
A research analyst is trying to determine whether a firm's price-earnings (PE) and price-sales (PS) ratios can explain the firm's stock performance over the past year. A PE ratio is calculated as a firm's share price compared to the income or profit earned by the firm per share. Generally, a high PE ratio suggests that investors are expecting higher earnings growth in the future compared to companies with a lower PE ratio. The PS 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 PS ratio to determine how much they are paying for a dollar of the firm's sales rather than a dollar of its earnings (PE ratio). In general, the lower the PS ratio, the more attractive the investment. The accompanying table shows a portion of the year-to-date returns (Return in %) and the PE and PS ratios for 30 firms.
Firm | Return | PE | PS |
1 | 4.6 | 14.36 | 2.41 |
2 | -4.3 | 11.01 | 0.78 |
3 | 5.9 | 11.97 | 2.24 |
4 | 4.9 | 11.29 | 1.37 |
5 | -11.2 | 9.84 | 1.82 |
6 | 20.6 | 15.65 | 0.84 |
7 | 64.2 | 16.05 | 1.59 |
8 | 18.7 | 8.98 | 1.03 |
9 | -15.4 | 11.35 | 2.75 |
10 | 48.2 | 13.77 | 1.46 |
11 | 7.5 | 11.49 | 1.21 |
12 | 20.9 | 14.35 | 1.33 |
13 | -18.3 | 8.2 | 0.84 |
14 | 2.9 | 9.49 | 2.65 |
15 | 12.2 | 11.21 | 1.96 |
16 | -3.8 | 12.68 | 2.77 |
17 | 2.1 | 9.71 | 1.99 |
18 | 16.2 | 13.46 | 1.13 |
19 | 23.1 | 14.95 | 3.37 |
20 | -1.2 | 8.97 | 2.4 |
21 | -8.3 | 10.53 | 3.68 |
22 | -3.6 | 7.89 | 2.22 |
23 | 15.8 | 16.38 | 4.58 |
24 | 21.3 | 16.27 | 0.86 |
25 | 6 | 15.09 | 2.32 |
26 | 11.6 | 9.17 | 0.99 |
27 | 13.8 | 14.94 | 1.39 |
28 | 15.8 | 15.58 | 0.9 |
29 | 0.9 | 12.58 | 0.46 |
30 | 16.3 | 13.94 | 1.98 |
Estimate: Return = 0 + 1PE + 2PS + . (Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.)
What is the predicted return for a firm with a PE ratio of 10 and a PS ratio of 2? (Negative value should be indicated by a minus sign. Do not round intermediate calculations. Round final answer to 2 decimal places.)
What is the standard error of the estimate? (Round your answer to 2 decimal places.)
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