You run a regression of monthly returns of Mapco,an oil and gas-producing firm,on the S&P500 Index and
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Question:
You run a regression of monthly returns of Mapco,an oil and gas-producing firm,on the S&P500 Index and come up with the following output for the period 1991-1995.
Intercept of the regression = 0.32%
X-coefficient of the regression = 1.21
Standard error of X-coefficient = 0.20
R2 = 36%
There are 20 million shares outstanding, and the current market price is $2/share.The firm has $20 million in debt outstanding. (The firm has a tax rate of 36%.)
a. What would an investor in Mapco's stock require as a return, if the Treasury bond rate is 1.25%?
b. What proportion of this firm's risk is diversifiable? Market risk premium is 6.51%.
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