The Price earnings ratio (PE ratio) for a stock is a commonly used measure of how over-priced or underpriced a company's stock is. There are a number of different statistics about a company that are available that might explain why this ratio differs for different companies. One of these statistics is a measure of future growth. To examine the relationship between P Es and the measure of future growth (FG), you run a simple regression and get the equation

PE=3+.9FG.

The R2 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

(a) Give a managerial interpretation for the coefficients 3 and .9

(B) A particular company has a value of 15 on the measure of future growth its P E ratio is 4.5 what would you conclude about this company's PE? Briefly explain

c) Since 13.2 is greater than. 9 can you conclude the PE ratio has a stronger relationship to dividends than future growth? If not, what would you need to know to conclude which variable has a stronger relationship to the P E ratio? Briefly explain.

d) a company looking at this equation, concludes that if it increases its dividends 0.1, its PE is expected to increase by 1.32. Is this a sensible interpretation? briefly explain.

e) A set of industries was identifed as high growth (HG) industries. to examine the relationship between the PE ratio and whether or not the company somes from 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