You have regressed price/sales ratios against fundamentals for NYSE stocks in 1994 and come up with the following regression.
PS = 0.42 + 0.33 PAYOUT + 0.73 GROWTH – 0.43 BETA + 7.91 MARGIN
For instance, a firm with a 35% payout, a 15% growth rate, a beta of 1.25 and a profit margin of 10% would have had a price/sales ratio of:
PS = 0.42 + 0.33 * 0.35 + 0.73 * 0.15 – 0.43 * 1.25 + 7.91 * 0.10 = 0.8985
a. What do the coefficients on this regression tell you about the independent variables relationship with the dependent variable? What statistical concerns might you have with this regression?
b. Estimate the price/sales ratios for all the drugstore chains described in question 2. Why might this answer be different from the one obtained from the regression of only the drug store firms? Which one would you consider more reliable and why?