MEMORANDUM

To: John McClintock, Manager

From: Alex Svoboda, Intern

Date: March 20, 2018

Subject: Multiple Regression

You recently asked me to examine the earnings per share regarding companies on the New York Stock
Exchange and to develop a model with residual plots for predicting earnings per share. The explanatory
variables that I chose to use were earnings before tax, operating margin, and pre-tax margin. This
document will seek to inform you on my model and any pertinent information.

ANOVA Table and Regression Statistics

Based on the data presented to me, I developed a regression model with an accompanying ANOVA table
that includes the factors previously mentioned, earnings before tax, operating margin, and pre-tax
margin. The null hypothesis would be H0: e=o=p=0 and the alternative hypothesis would be Ha: e=o=p≠0
where e is earnings before tax, o is operating margin and p is pre-tax margin.

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.441688
R Square 0.195088 Alex Svoboda
Adjusted R Square 0.193521
Standard Error 4.235261
Observations 1545

ANOVA
df SS MS F Significance F
Regression 3 6699.543033 2233.181 124.4984 3.32E-72
Residual 1541 27641.58326 17.93743 Alex Svoboda
Total 1544 34341.12629

Coefficients Standard Error t Stat P-value Lower 95%Upper 95%Lower 95.0%

Upper 95.0%
Intercept 4.200269 0.155840351 26.95238 2.1E-131 3.894587 4.505951 3.894587 4.505951
Earnings Before Tax 2.12E-10 1.81604E-11 11.65326 3.89E-30 1.76E-10 2.47E-10 1.76E-10 2.47E-10
Operating Margin -0.06631 0.011239926 -5.89948 4.47E-09 -0.08836 -0.04426 -0.08836 -0.04426
Pre-Tax Margin -0.00925 0.010655793 -0.86849 0.385264 -0.03016 0.011647 -0.03016 0.011647

My regression equation was y = 2.12E-10 - .0660o - .00925p + 4.2. The R2 value is .19 which indicates
that 19% of the variance in the dependent variable, earnings per share is explained by the behavior of
the independent variables. The se in the model is 4.24 which indicates that on average, our earnings per
share are off by ± $4.24 per share.
Tests of Significance

The Test of Joint Significance null hypothesis is Ho: all Bs = 0 while the alternative hypothesis is Ha: at
least one B ≠ 0. Based on the F score, we can reject the null hypothesis and accept the alternative
hypothesis and can conclude that at least one of the explanatory variables does not equal 0. For the
Tests of Individual Significance the null hypotheses are Ho: e=o, e=p, and p=o while the alternative
hypothesis would be Ha: e≠o, e≠p, and p≠o. Based on these tests, we can conclude that the explanatory
variable Pre-Tax Margin is insignificant on the impact of the overall model.

Interpretation and Regression

With this model, as Earnings Before Tax increases by $1, Earnings per share increases by 2.1E-10 dollars
per share, on average all else constant. In addition, as Operating Margin increases by $1, Earnings per
Share decreases by $.06. In addition, as Pre-Tax Margin increases by $1, Earnings per Share decreases by
$.009. In other words, when Pre-Tax Margin increases by $10, Earnings per Share decreases by $.09.
The residual plots indicate that the data among the three explanatory variables appears to follow a
normal distribution and most of the data falls close to the model. The only exception might be earnings
before tax which has some points that are slightly off the equation line. These plots indicate R2 and the
significance tests appear to be accurate and are a reliable source of information.

Now that you have ben provided with the information and tests that I conducted, I can recommend a
strategy for you to increase our business most effectively. Based on the data given to me, as well as the
Test of Joint Significance, I can reject the null hypothesis for this model and can conclude that at least
one explanatory variable is significant to the model. However, based on the tests of individual
significance, I can conclude that pre-tax margin has an insignificant effect on the overall model. I would
look for companies with a strong earnings before tax and operating margin to buy stock in as they have
a significant effect on the earnings per share. It was a pleasure to conduct this test, and I encourage you
to share any questions you might have with me at alexandersvobooda@email.arizona.edu.