Question

Below are revenue and profit (both in $ billions) for nine large entertainment companies. Revenue and Profit of Nine Entertainment Companies (See the attached Excel file for correct, readable format)

Company Revenue Profit

AMC Entertainment 1.792 -0.020

Clear Channel Communication 8.931 1.146

Liberty Media 2.446 -0.978 Metro-

Goldwyn-Mayer 1.883 -0.162

Regal Entertainment Group 2.490 0.185

Time Warner 43.877 2.639

Univision Communications 1.311 0.155

Viacom 26.585 1.417

Walt Disney 27.061 1.267

Correlation and Regression

Make a scatterplot of profit as a function of revenue. Use Excel to fit the Trendline to the above problem data. Display the Regression Equation and R2. Explain the meaning of the Regression Equation and the R2. How would this model be applied to financial analysis and forecasting?

Answer 1

let us consider x = revenue

y=profit

using excel>data>data analysis>regression

we have

Simple Linear Regression Analysis
Regression Statistics
Multiple R	0.9059
R Square	0.8206
Adjusted R Square	0.7950
Standard Error	0.4904
Observations	9
ANOVA
	df	SS	MS	F	Significance F
Regression	1	7.7030	7.7030	32.0295	0.0008
Residual	7	1.6835	0.2405
Total	8	9.3865
	Coefficients	Standard Error	t Stat	P-value	Lower 95%
Intercept	-0.1830	0.2173	-0.8419	0.4276	-0.6969
revenue	0.0627	0.0111	5.6595	0.0008	0.0365

the Regression Equation is y = 0.063x -0.183

the value R2 = 0.8206 , about 82.06% variation in profit can be explained by the revenue .

interpretation of slope : for every 1 $ increase in revenue there is 0.06$ doller increase in the profit

interpretation of intercept: if there is no increase in the revenue there is 0.183 $ decrease in the profit .