# Question: You have just run a regression of monthly returns on

You have just run a regression of monthly returns on MAD, a newspaper and magazine publisher, against returns on the S&P 500, and arrived at the following result:

RMAD = −0.05% + 1.20 RS&P

The regression has an R2 of 22%. The current Treasure bill rate is 5.5% and the current Treasure bond rate is 6.5%. The risk-free rate during the period of the regression was 6%. Answer the following questions relating to the regression:

a. Based on the intercept, you can conclude that the stock did

i. 0.05%worsethanexpectedonamonthlybasis, during the regression.

ii. 0.05% better than expected on a monthly basis during the period of the regression.

iii. 1.25% better than expected on a monthly basis during the period of the regression.

iv. 1.25% worse than expected on a monthly basis during the period of the regression.

v. None of the above.

b. You now realize that MAD went through a major restructuring at the end of last month (which was the last month of your regression), and made the following changes:

• The firm sold off its magazine division, which had an unlevered beta of 0.6, for $20 million.

• It borrowed an additional $20 million and bought back stock worth $40 million.

After the sale of the division and the share repurchase, MAD had $40 million in debt and $120 million in equity outstanding. If the firm’s tax rate is 40%, re-estimate the beta after these changes.

RMAD = −0.05% + 1.20 RS&P

The regression has an R2 of 22%. The current Treasure bill rate is 5.5% and the current Treasure bond rate is 6.5%. The risk-free rate during the period of the regression was 6%. Answer the following questions relating to the regression:

a. Based on the intercept, you can conclude that the stock did

i. 0.05%worsethanexpectedonamonthlybasis, during the regression.

ii. 0.05% better than expected on a monthly basis during the period of the regression.

iii. 1.25% better than expected on a monthly basis during the period of the regression.

iv. 1.25% worse than expected on a monthly basis during the period of the regression.

v. None of the above.

b. You now realize that MAD went through a major restructuring at the end of last month (which was the last month of your regression), and made the following changes:

• The firm sold off its magazine division, which had an unlevered beta of 0.6, for $20 million.

• It borrowed an additional $20 million and bought back stock worth $40 million.

After the sale of the division and the share repurchase, MAD had $40 million in debt and $120 million in equity outstanding. If the firm’s tax rate is 40%, re-estimate the beta after these changes.

## Answer to relevant Questions

Time Warner, the entertainment conglomerate, has a beta of 1.61. Part of the reason for the high beta is the debt left over from the leveraged buyout of Time by Warner in 1989, which amounted to $10 billion in 1995. The ...Southwestern Bell, a phone company, is considering expanding its operations into the media business. The beta for the company at the end of 1995 was 0.90, and the debt to equity ratio was 1. The media business is expected to ...Novell, which had a market value of equity of $2 billion and a beta of 1.50, announced that it was acquiring WordPerfect, which had a market value of equity of $1 billion and a beta of 1.30. Neither firm had any debt in its ...You have to pick between three mutually exclusive projects with the following cash flows to the firm: The cost of capital is 12%. a. Which project would you pick using the NPV rule? b. Which project would you pick using the ...You are provided with the projected income statements for a project: • The tax rate is 40%. • The project required an initial investment of $15,000 and an additional investment of $2,000 at the end of year 2. • The ...Post your question