ANALYTICS REPORT

TO: GRAY HUNTER

FROM: EMILY STRICKLER

SUBJECT: LAB #5

DATE: 10/12/2020

Introduction

Given the information about companies that are traded on the New York Stock Exchange, I
developed a model to predict earnings per share. The purpose of this was to determine which
variables would be helpful to our company in predicting the companies that would be worth
investing in. This document contains regression tests that identify the variables that are good
predictors of earnings per share.

Data Analysis
Regression Equation
^
E /S=4.13+2.03 E - 10 ( EBT )−.06 ( OM )−0.004 (PTM )
Fit of the Model
The R2 = 0.16 tells us we are 16% of the way to perfectly predicting earnings per share using this
model.
The standard error of 4.25 tells us our predictions of earnings per share are off by an average of
$4.25/share.

Test of Joint Significance

H0: None of the explanatory variables are significant.
HA: At least one of the explanatory variables is significant.
Because the p-value is 7.52E-55, and it is less than alpha at 0.05, we reject the null hypothesis
and prove our claim that one or more of the explanatory variables is significant.

Earnings Before Tax

H0: Earnings Before Tax is not significant for predicting Earnings per Share.
HA: Earnings Before Tax is significant for predicting Earnings per Share.
Since the p-value is less than alpha of 0.05, we reject the null hypothesis and therefore, prove the
Earnings Before Tax is significant.
As Earnings Before Tax increases by $1 billion, Earnings per share increases by $0.20/share, on
average and all else constant.
Based on the residual model for Earnings Before Tax, which appears to have a funnel
shape, it shows that there is a change in variability since there is more error for small
Earnings Before Tax and less error for Large Earnings Before Tax. Therefore, there is
heteroskedastic which means that the standard error for Earnings Before Tax may be
incorrect as well as the p-values.
Operating Margin
H0: Operating margin is not significant when predicting earnings per share.
HA: Operating margin is significant for predicting earnings per share.
Since operating margin has a p-value of 4.05E-08, and is less than alpha of 0.05, we reject the
null hypothesis, and conclude that operating margin is significant for predicting earnings per
share.
As operating margin increases by 1 percentage point, earnings per share decreases by
$0.06/share on average and all else constant.
Upon looking at the residual model for Operating Margin, I see no clear shape; it looks
random. Therefore, we can trust the coefficient and significance testing regarding
operating margin.
Pre-Tax Margin
H0: Pre-tax margin is not significant for predicting earnings per share.
HA: Pre-tax margin is significant for predicting earnings per share.
Since pre-tax margin has a p-value of 0.70, which is greater than the alpha (0.05), we do not
reject the null, and can conclude that pre-tax margin is not significant for predicting earnings per
share.
Upon looking at the residual model for Pre-Tax Margin, I see no clear shape; it looks
random. Therefore, we can trust the coefficient and significance testing regarding
operating margin.

Multicollinearity and Excluded Variables

Since the explanatory variables for Pre-Tax Margin and Operating margin are over 0.8, we can
conclude that this is too high and in result, may not be correlated with one another and are
insignificant. There is no evidence of endogeneity in the data because the residuals show that
there is no large correlation; they are all close to zero.
Investment Decision Prediction
IBM:

4.13+ 2.03× 10−10 × 7.04 ×10 9−0.06 ×10.65−0.004 × 9.32=4.88284

HP:

4.13+ 2.03× 10−10 × 7 3.41× 109−0.06 ×−0.05−0.004 × 0.58=4.8 2291

Based on the results of the above equations, I would recommend HP. The reason being so is it
has a lower Operating Margin which results in a higher Earnings Per Share.
Conclusion
After running the regressions, it has been determined that earnings per tax, and operating margin
are all good predictors of earnings per share. This information is valuable because it helps the
company know which companies to invest in. If you have any further questions, or would like
more information please contact me via email, at emilystrickler@email.arizona.edu.

Appendix
SUMMARY OUTPUT

Regression Statistics
Multiple R 0.40104488
R Square 0.16083699
Adjusted R Square
0.15910079
Standard Error 4.25037521
Observations 1454

ANOVA
df SS MS F Significance F
Regression 3 5020.67556 1673.55852 92.6374014 7.5194E-55
Residual 1450 26195.2496 18.0656894
Total 1453 31215.9252

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Intercept 4.13330398 0.16407768 25.1911414 1.906E-116 3.81144898 4.45515898
Earnings Before Tax
2.0312E-10 1.8548E-11 10.951444 7.1428E-27 1.6674E-10 2.3951E-10
Operating Margin -0.0637516 0.01155257 -5.518395 4.0467E-08 -0.0864132 -0.0410901
Pre-Tax Margin -0.0041817 0.01089071 -0.3839701 0.70105692 -0.0255449 0.01718152
Emily Strickler

Operating Margin Residual Plot

10
8
6
4
2
Residuals

0
0 5 10 15 20 25 30 35 40 45 50
-2
-4
-6
-8
-10
Operating Margin
 Earnings Before Tax Residual Plot
60
50
40
30
20
Residuals

10
0
-50000000000 -10 0 50000000000 100000000000
-20
-30
-40
Earnings Before Tax

Pre-Tax Margin Residual Plot

10
8
6
4
2
Residuals

0
-2 0 5 10 15 20 25 30 35 40 45 50
-4
-6
-8
-10
Pre-Tax Margin
 Residuals Earnings BeforeOperating
Tax Margin
Pre-Tax Margin
Residuals 1
Earnings Before Tax
-1.72879E-15 1
Operating Margin-2.45572E-15 -0.1119405 1
Pre-Tax Margin 5.03355E-16 -0.0402728 0.8524628 1