Question

Please explain what the results for A1, A2, and A3 mean?

5) Investors and financial rescarchers are interested in und inancial researchers are interested in understanding the stock market value a Tim sequity i.e., its shares). In a fundamental sense, the value of a firm's shares (le, its man capitalization) should reflect investors' expectations of the firm's future profitability. However, data on expected future profitability is non-existent Instead, empirical financial studies must use measures such as current income, sales, assets and debt of the firm as variables we can observe now but may influence the future prospects of the firm. In the file equity.xls (or equity.dta) you have data on 309 US firms in 2015. The variables (measured in millions of dollars) are: VALUE = the total value of all shares (new and old) outstanding just after the firm issued the new shares DEBT - the amount of long-term debt held by the firm SALES = total sales of the firm INCOME - net income of the firm ASSETS-book value of the assets of the firm You regress VALUE on SALES and have the following report: . reg value sales Source SS of MS Model 278629628 1 278629628 Residual 1.3854e-69307 4512586.96 Number of obs - 309 FC 1. 307) - 61.74 Preb>F R-squared - 6.1674 Adj R-squared - 6.1647 Root MSE = 2124.3 Total 1.6646e+09 308 5462577.35 value Coef. Std. Err. t Pt 1954 Conf. Intervall sales cons .7760338 372.3999 .0987667 126.2034 7.86 2.95 .000 ..003 .5817434 124.0668 .9764341 620.7331 Please comment on the following statements based on the regression result Al: Companies with large sales tend to be worth more (as measures by market value) than those with small ones. (5pt) A2: A firm can increase its market value by increasing its total sales. (Please discuss the assumptions for the statement to be true.) (10pt) A3: The variance in sales account for 17% of the variability in market capitalization. (Spt)

Answer 1

5.

Ans:

We have:

Regression equation: Value = 372.399 + 0.7768 Sales

R-squared = 0.1674

Interpretations:

A1:

Using regression equation, we can see that there is direct relation between value and sales. For greater sales, value on an average increases which implies that companies having greater sales have greater value.

A2:

Using regression equation, we can see that 1 unit increase in sales causes 0.77 units increase in value on average which implies that by improving sales, a company can increase its value.

But this is true when all other factors are kept constant. If there is external variability other than sales then impact can be ambiguous.

Assumption required = Ceteris paribus i.e. all other things remaining constant.

A3:

Variability in Value that can be explained by variability in sales is only 0.17 or 17% which can be understood after seeing R-squared.

R-squared = Variation explained in Y using regressors / Total variation in Y.

If you are satisfied with the answer, please provide a positive rating. Feel free to comment in case of queries.

Have a nice day ahead!