You are comparing the regression output across two publicly-traded companies. Both regressions were run using monthly data

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Question:

You are comparing the regression output across two publicly-traded companies. Both regressions were run using monthly data for 5 years and against the S&P500 with the returns on each company’s stock as the independent variable.

	Nero Cannery	Rand Foods
Intercept	0.15%	0.45%
R-squared	20%	35%
Slope	1.20	1.10

1. If the implied equity risk premium with a constant dividend growth rate and based on a broad U.S. stock market index is equal to 8% and the risk-free rate is 2%, what is the required return of an investor in Nero Cannery? Rand Foods?

2. You just found out that even though Rand Foods is incorporated in the U.S. it gets 100% of its revenues from Mexico. Is it appropriate to use an implied equity risk premium based on a U.S. stock market index for calculating an investor’s required return in Rand? Why or why not? If the Mexican government bond rating is A3 (not default-free), how will you approach the estimation of the ERP, i.e. what method will you use and what information do you need?

3. Is the regression above an “excess returns” regression or a “raw returns” regression? Explain.

(4) Interpret the R² and intercept for Rand Foods.