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

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?

**View Solution:**## Answer to relevant Questions

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%. ...As the result of stockholder pressure, RJR Nabisco is considering spinning off its food division. You have been asked to estimate the beta for the division and decide to do so by obtaining the beta of comparable publicly ...Safecorp, which owns and operates grocery stores across the United States, currently has $50 million in debt and $100 million in equity outstanding. Its stock has a beta of 1.2. It is planning a leveraged buyout, where it ...Businesses with severe capital rationing constraints should use IRR more than NPV. Do you agree? Explain. Answer true or false to the following statements: a. The return on equity for a project will always be higher than the return on capital on the same project. b. If the return on capital is less than the cost of equity, the ...Post your question