# Question

You have run a regression of monthly returns on Amgen, a large biotechnology firm, against monthly returns on the S&P 500 Index, and come up with the following output:

Rstock = 3.28% + 1.65 RMarket R2 = 0.20

The current one year Treasury bill rate is 4.8% and the current thirty year bond rate is 6.4%. The firm has 265 million shares outstanding, selling for $30 per share.

a. What is the expected return on this stock over the next year?

b. Would your expected return estimate change if the purpose was to get a discount rate to analyze a thirty-year capital budgeting project?

c. An analyst has estimated correctly that the stock did 51.10% better than expected annually during the period of the regression. Can you estimate the annualized risk-free rate that she used for her estimate?

d. The firm has a debt-to-equity ratio of 3% and faces a tax rate of 40%. It is planning to issue $2 billion in new debt and acquire a new business for that amount, with the same risk level as the firm’s existing business. What will the beta be after the acquisition?

Rstock = 3.28% + 1.65 RMarket R2 = 0.20

The current one year Treasury bill rate is 4.8% and the current thirty year bond rate is 6.4%. The firm has 265 million shares outstanding, selling for $30 per share.

a. What is the expected return on this stock over the next year?

b. Would your expected return estimate change if the purpose was to get a discount rate to analyze a thirty-year capital budgeting project?

c. An analyst has estimated correctly that the stock did 51.10% better than expected annually during the period of the regression. Can you estimate the annualized risk-free rate that she used for her estimate?

d. The firm has a debt-to-equity ratio of 3% and faces a tax rate of 40%. It is planning to issue $2 billion in new debt and acquire a new business for that amount, with the same risk level as the firm’s existing business. What will the beta be after the acquisition?

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