The Regression Model Developed to Predict a Firm's Price-Earnings Ratio $$\mathrm { PE } = 8.04 + 0.757 \text { Growth Rate } + 0.0516 \text { Profit Margin } + 2.09 \text { Green? }$$

question 29

Multiple Choice

The regression model developed to predict a firm's Price-Earnings Ratio (PE)
Based on Growth Rate, Profit Margin, and whether or not the firm is Green (1 = Yes, 0 =
no. is $$\mathrm { PE } = 8.04 + 0.757 \text { Growth Rate } + 0.0516 \text { Profit Margin } + 2.09 \text { Green? }$$
Which of the following is the correct interpretation for the regression coefficient of
Green?

• A) 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.
• B) 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.
• C) 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.
• 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 is not significantly different from zero.

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Definitions:

Effective Interest Method

An accounting technique for calculating interest expense on bonds that amortizes discount or premium over the life of the bonds.

Straight-line Method

A depreciation technique that allocates an equal portion of the value of an asset over its useful life, used to gradually reduce the asset's book value.

Par Value

A nominal value or face value given to a share of stock at the time of its issuance, often used for legal and accounting purposes.

Market Rate

The market rate is the prevailing interest rate available in the marketplace or the current price of a commodity, security, or currency.