It is a shiny morning, you are landing at Guarulhos Airport in Sao Paulo, Brazil. Sambapati, a very well-known Brazilian corporation has hired you as consultant for determining its cost of capital. During the next following weeks, you are very busy in meetings, and doing financial modeling. One of your main concerns is that Sambapati is not a publicly traded company.

After some thinking you decide to go ahead and run a multiple regression analysis. You have the following variables in your model:

Sambapati Quarterly Earnings (SPTE)

Sambapati Quarterly ROE (SPTROE)

S&P Companies Quarterly Earnings (SPE)

Bovepsa* Companies Quarterly Earnings (BOVE)

*Bovepsa is the Brazilian stock index

Price to Book Ratio of the SP 500 Companies (PBSP)

You run the regression in STATA with 20 quarters of data.

At the end you produce the following model:

SPTE= 0.59 + 4.56 (SPE) 3.45 (SPTROE) + 2.85 (BOVE) - 1.38(PBSP)

Required:

a. What specifically is the goal of this model?

b. Interpret the meaning of each one of the coefficients of this model

c. What are the strengths of this model? Be specific.

d. What are the weaknesses of this model? Be specific.

e. How would you change this model?