The predicted value of the companys ROE if its GO is 10 percent is closest to: A.
Question:
The predicted value of the company’s ROE if its GO is 10 percent is closest to:
A. 1.8 percent.
B. 15.8 percent.
C. 22.0 percent.
An analyst has estimated a model that regresses a company’s return on equity (ROE) against its growth opportunities (GO), defined as the company’s three-year compounded annual growth rate in sales, over 20 years, and produces the following estimated simple linear regression:
ROEi = 4 + 1.8 GOi + εi.
Both variables are stated in percentages, so a GO observation of 5 percent is included as 5.
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