The price-earnings ratio (PE ratio) for a stock is commonly used measure of how over-priced or underpriced a companys 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 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 ratio is 4.5. What would you conclude about the companys PE? Briefly explain.

3. 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 PE ratio? Briefly explain.