You have just run a regression of monthly returns on MAD Inc against returns on the S&P 500, and arrived at the following result ñ
RMAD = ñ 0.05% + 1.20 RS&P
The regression has an R-squared of 22%. The current T.Bill rate is 5.5% and the current T.Bond rate is 6.5%. The riskfree rate during the period of the regression was 6%.. Answer the following questions relating to the regression ñ
a. Based upon the intercept, you can conclude that the stock did
A. 0.05% worse than expected on a monthly basis, during the regression.
B. 0.05% better than expected on a monthly basis during the period of the regression
C. 1.25% better than expected on a monthly basis during the period of the regression.
D. 1.25% worse than expected on a monthly basis during the period of the regression.
E. None of the above.
b. You now realize that MAD Inc went through a major restructuring at the end of last month (which was the last month of your regression), and made the following changes ñ
- The firm sold off its magazine division, which had an unlevered beta of 0.6, for $ 20 million.
- It borrowed an additional $ 20 million, and bought back stock worth $ 40 million.
After the sale of the division and the share repurchase, MAD Inc. had $ 40 million in debt and $ 120 million in equity outstanding.
If the firmís tax rate is 40%, re-estimate the beta, after these changes.