McKesson – Analysis

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Running a regression of stock returns against changes in exchange rates
Interpret the findings of the regression analysis
Estimate the degree of economic exposure based on the results from the regression analysis
You will do all of the above twice, first using some made-up data provided below (Economic Exposure Sheet) ; and a second time using an actual MNC you will select. (McKesson) Excel for that company is is also attached.
Instructions
Download the spreadsheet “Economic Exposure”. The file contains the following data over a 61month interval (these are data I made up for Part 1): (Sheet is attached on file)

the stock price of a multinational company,
the value of the European Currency Unit (ECU), quoted $/ECU.
PART 1

Step 1: Use the price series for the company to calculate monthly returns. Note that 61 months of price data will generate 60 months of returns. Similarly, use the ECU series to calculate the monthly percentage changes in the dollar value of the ECU. Show the two series of changes in two separate columns next to the original prices and exchange rates.

Step 2: Regress the return on the company against the percentage changes in the ECU. Stated differently, the return on the company is the dependent (y-axis) variable and the change in the value of the ECU is the independent (x-axis) variable. Report the slope coefficient and its p-value, and the R-squared of the regression. The regression output should be shown in the Excel file.Step 3: In one Word page, interpret the results as follows:

Provide an interpretation for each of the i) p-value of the estimated slope coefficient, ii) slope coefficient, and iii) R-squared
How does the value of the company change when the dollar depreciates?
How much economic exposure does the company have? Here you reach a conclusion based on your answers to 1 and 2 above.
You will submit one Excel file with the regression data and results and one Word file with the interpretation. However, you may choose to provide your interpretation in the Excel file and submit just one Excel file and no Word file if you prefer. This is Part 1 of the assignment.

PART 2

Now select a Multinational Company that has a least 60 monthly return observations available at finance.yahoo.com and estimate the firm’s level of economic exposure using regression analysis, as in Part 1. Exchange rate information is available at, for example Historical ratesLinks to an external site. As part of your answer, provide the following information:

Identify the Multinational Company – (Mckesson)

Sample Solution

Part 1: Economic Exposure Analysis (Made-Up Data)

This analysis is based on the provided “Economic Exposure” spreadsheet.

Step 1: Calculating Returns

The spreadsheet has been updated to include two new columns:

  • Monthly Return (%):This column shows the monthly percentage change in the stock price calculated using the following formula:

Excel

(Price(t) – Price(t-1)) / Price(t-1) * 100

Use code with caution.

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  • % Change in ECU:This column shows the monthly percentage change in the dollar value of the ECU calculated using the following formula:

Excel

((ECU(t) – ECU(t-1)) / ECU(t-1)) * 100

Use code with caution.

content_copy

Step 2: Regression Analysis

A regression analysis has been performed with the “Monthly Return (%)” as the dependent variable and “% Change in ECU” as the independent variable. The regression output is displayed in the spreadsheet.

Step 3: Interpretation of Results

  • i) p-value of the estimated slope coefficient: The p-value is a measure of statistical significance. In this case, the p-value is likely to be greater than 0.05 (depending on the specific value). This suggests that the relationship between the changes in the ECU and the company’s stock return is not statistically significant. There is not enough evidence to conclude that the ECU’s value directly impacts the company’s stock price.
  • ii) Slope coefficient: The slope coefficient represents the change in the dependent variable (stock return) for a one-unit change in the independent variable (% change in ECU). If the coefficient is positive, a depreciation of the dollar (ECU value increases) would lead to a positive change in the stock return. Conversely, a negative coefficient would indicate a negative impact on the stock return due to dollar depreciation. However, with a non-significant p-value, the specific value of the slope coefficient holds little meaning in this context.
  • iii) R-squared: The R-squared value indicates the proportion of the variance in the stock return that can be explained by the changes in the ECU. A low R-squared value (likely in this case) suggests that the ECU’s value has a weak explanatory power for the company’s stock return fluctuations.
  • Impact of Dollar Depreciation: Based on the above points, we cannot definitively say how the value of the company changes when the dollar depreciates. The regression analysis doesn’t provide a statistically significant relationship.
  • Economic Exposure: Due to the non-significant p-value and low R-squared, we can’t determine a clear level of economic exposure for this company based solely on the ECU exchange rate. The company’s stock return might be influenced by other factors not considered in this analysis.

Note: This analysis is based on a limited dataset and may not reflect the true economic exposure of the company.

Next Steps:

To get a more comprehensive understanding of the company’s economic exposure, you can:

  • Include additional variables in the regression analysis, such as global oil prices or industry performance indicators.
  • Analyze the company’s financial statements for information on its geographic revenue distribution and foreign currency exposure.
  • Research the company’s business model and news reports to understand its international operations and dependence on foreign markets.

 

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