A regression model below was developed to predict a firm’s Price-Earnings Ratio

Question

A regression model below was developed to predict a firm’s Price-Earnings Ratio (PE) using Growth Rate, Profit Margin, and whether the firm is Green (1 = Yes, 0 = No). Which of the following is the correct interpretation for the regression coefficient of Green? (PE) =8.04+0.747GrowthRate+0.0516ProfitMargin+2.09Green

A) The regression coefficient indicates that the PE ratio of a firm that is green will, on average, be 2.09 times higher than a firm that is not green with the same growth rate and profit margin.

B) The regression coefficient is not significantly different from zero

. C) The regression coefficient indicates that the PE ratio of a firm that is green will, on average, be 2.09 higher than a firm that is not green with the same growth rate and profit margin.

D) The regression coefficient indicates that the PE ratio of a firm that is green will, on average, be 2.09 times lower than a firm that is not green with the same growth rate and profit margin.

E) The regression coefficient indicates that the PE ratio of a firm that is green will, on average, be 2.09 lower than a firm that is not green with the same growth rate and profit margin.

Explanation / Answer

Ans:

Option A is correct.

A) The regression coefficient indicates that the PE ratio of a firm that is green will, on average, be 2.09 times higher than a firm that is not green with the same growth rate and profit margin.

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