From Applied Corporate Finance - 4th Edition:

Chapter 4, Question 5:

You have just done a regression of monthly stock returns of HeavyTech, a manufacturer of heavy machinery, on monthly market returns over the past five years and come up with the following regression:

RHeavyTech = 0.5% + 1.2RM

The standard deviation of the stock is 50%, and the standard deviation of the market is 20%. The current Treasure bill rate is 3% (it was 5% one year ago). The stock is currently selling for $50, down $4 over the past year, and has paid a dividend of $2 during the past year and expects to pay a dividend of $2.50 over the next year. The NYSE composite has gone down 8% over the past year, with a dividend yield of 3%. HeavyTech has a tax rate of 40%.

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

b. What would you expect HeavyTechs price to be one year from today?

c. What would you have expected HeavyTechs stock returns to be over the past year?

d. What were the actual returns on HeavyTech over the past year?

e. HeavyTech has $100 million in equity and $50 mil- lion in debt. It plans to issue $50 million in new eq- uity and retire $50 million in debt. Estimate the new beta.