Question 1.2 Ex Post Beta Coefficient

It is May 1, 2020. The latest stock price for Red Rock Mining Company (RRM.TO) is $14.01. Issued capital is equal to the number of shares outstanding for Red Rock Mining Company in the month as illustrated in Table 1.2. The expected return on the market in 2020 is 10%, and the risk-free rate is 1.1%.

Table 1.2 provides historical monthly data for Red Rock Mining Company Limited and for the index values for the S&P/TSX Total Return Index over the same period.

Required: Using an embedded Excel Spreadsheet, normalize the stock price and dividend per share data and calculate the monthly holding period (total percentage) returns for both the Red Rock Mining and the S&P/TSX. Run a least square linear regression using the returns on the S&P/TSX Total Return Index as the independent variable, and the returns on the Red Rock Mining as the dependent variable. Show the regression results. (Summary output) In Excel, plot a properly labeled Characteristic line for Red Rock Mining. Based on the Regression results, what is the beta coefficient of the Red Rock Mining? Is the stock an aggressive investment or defensive investment? Explain how you interpret a beta coefficient and how you decide whether a stock is aggressive or defensive. Based on the Regression results, what is the R-squared? Explain the relevance of the R-squared when interpreting the degree to which the Beta Coefficient can be relied upon, and whether its use in a DDM valuation model can be recommended. What proportion of total risk is systematic? What proportion of total risk is company-specific? Based on the Regression results, what is the vertical intercept of the Characteristic Line? What does the vertical intercept of the regression model tell you? If RRM.TO paid a dividend per share of $1.63 last year, and dividends are expected to grow at a rate of 5% for the foreseeable future, calculate the intrinsic value of RRM.TO using the CAPM to predict the investors required rate of return. Is RRM.TO fairly priced?

. Font Paragraph Styles Table 1.2 - Market Data _Red Rock Mining Company Ending S&P/TSX Total Return Ending Year 2020 Month April March February January December November October September August 2019 Issued Capital Stock Price Dividend 8,500,000 $ 13.88 8,500,000 $ 15.20 $ 0.03 8,500,000 $ 14.60 8,500,000 $ 13.79 8,500,000 $ 12.85 $ 0.03 |8,500,000 $ 13.70 8,500,000 $ 14.04 8,500,000 $ 13.50 $ 0.03 4,250,000 $ 24.50 4,250,000 $ 23.55 4,250,000 $ 21.70 $ 0.06 4,250,000 $ 24.04 4,250,000 $ 21.34 Index 41,456 40,792 40,452 40,003 39,719 39,555 40,241 38,945 38,410 38,108 37,956 38,214 37,290 July June May April nglish (India) arch O O 9 w ^ E O . Font Paragraph Styles Table 1.2 - Market Data _Red Rock Mining Company Ending S&P/TSX Total Return Ending Year 2020 Month April March February January December November October September August 2019 Issued Capital Stock Price Dividend 8,500,000 $ 13.88 8,500,000 $ 15.20 $ 0.03 8,500,000 $ 14.60 8,500,000 $ 13.79 8,500,000 $ 12.85 $ 0.03 |8,500,000 $ 13.70 8,500,000 $ 14.04 8,500,000 $ 13.50 $ 0.03 4,250,000 $ 24.50 4,250,000 $ 23.55 4,250,000 $ 21.70 $ 0.06 4,250,000 $ 24.04 4,250,000 $ 21.34 Index 41,456 40,792 40,452 40,003 39,719 39,555 40,241 38,945 38,410 38,108 37,956 38,214 37,290 July June May April nglish (India) arch O O 9 w ^ E O