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.
i. What is the expected return on this stock over the next year?
ii. Would your expected return estimate change if the purpose was to get a discount rate to analyze a thirty-year capital budgeting project?
iii. 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 riskfree rate that she used for her estimate?
iv. The firm has a debt/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?