INTEROFFICE MEMORANDUM

TO: PROFESSOR GRAY

FROM: PETER LEBLANC

SUBJECT: CH. 14

DATE: OCTOBER 9, 2018

Introduction
Per the request for an examination, I examined data relating to which variables help
predict Earnings per Share. I evaluated the differences by conducting a regression test,
and discovered that at least one variable is helpful. The following document outlines
three different variables and how well they predict Earnings Per Share.

Data Analysis
SUMMARY OUTPUT Peter LeBlanc

Regression Statistics
Multiple R 0.452092
R Square 0.204387
Adjusted R Square
0.202785
Standard Error
4.21441
Observations 1494

ANOVA
df SS MS F Significance F
Regression 3 6798.485 2266.162 127.5902 1.47E-73
Residual 1490 26464.26 17.76125
Total 1493 33262.75

Coefficients
Standard Error t Stat P-value Lower 95%Upper 95%Lower 95.0%
Upper 95.0%
Intercept 4.255336 0.157117 27.08382 1.1E-131 3.947142 4.563531 3.947142 4.563531
Earnings Before
2.09E-10
Tax 1.81E-11 11.51895 1.8E-29 1.73E-10 2.44E-10 1.73E-10 2.44E-10
Operating Margin
-0.06913 0.011371 -6.07929 1.53E-09 -0.09143 -0.04682 -0.09143 -0.04682
Pre-Tax Margin
-0.0087 0.010767 -0.80811 0.419156 -0.02982 0.01242 -0.02982 0.01242
Analysis:
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 ̂ 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒= 4.26 + 2.10 (Earnings Before Tax) -0.06913 (Operating Margin)
-0.0087 (Pre-Tax Margin)
The R-squared value (0.204) shows that we are 20% of the way towards making a perfect
prediction of earnings using this model. The standard error (4.21441) shows Earnings
Per Share predictions are off by an average of $4.21 per share. The P-Value of 1.47E-73
is far below the Alpha of .05 which suggests that there is at least one helpful variable.
Looking at the individual P-Values, Operating margin (1.53E-09) and Earnings Before
Tax (1.8E-29) are significant at the alpha level while Pre-Tax Earnings (0.42) isn’t.
Operating Margin and Earnings Before Tax are good indicators of Earnings per share
while Pre-Tax Margins are not. As Operating Margin increases by 1 unit, Earnings per
Share decreases by $.07 per share on average when all else is constant. As Earnings
Before Tax increases by $1 Billion, Earnings per Share increases by $.21 per share on
average when all else is constant.

Conclusion
After analyzing the information, we see that Operating Margin and Earnings Before Tax
are good indicators of Earnings per Share. Our R-Squared Value shows us that we are
20% of the way towards making a perfect prediction and our individual P-Values show
that Operating Margin and Earnings Before Tax are the best indicators. If you have any
questions regarding these recommendations, please contact me at intern@ylc.com.