A. In practice, we often regress a stock's returns against those of a broad market index, such as the S&P 500 Index, to find the stock's equity beta. Monthly returns from the previous 5 years are commonly used in the regressions. However, this methodology is not always appropriate For each of the three scenarios below, comment whether this methodology is appropriate or not, and briefly state your reasoning Hint: Finance is forward looking. What is the inherent assumption we make when we use historical data to come up with an estimate for the future? See whether this assumption holds in each of the following three cases. (i) Company A underwent financial distress 2 years ago, but is now financially healthy (ii) Company B is doing well. Its financial leverage and business operations haven't changed much over the past 5 years. (iii) Company C just entered a new business that is a lot more risky than the company's current businesses. The new business is expected to generate the majority of the firm's cash flows after 2 years. . The Conglomerate Corp. has multiple business lines. Because the company is big with diversified business operations, its equity beta is low, approximately 0.8. The company enjoys a lower cost of equity than the average firm. The company is entirely funded by equity, so its cost of equity is also its cost of capital. The company's CEO believes that the company should invest more in high beta projects to take advantage of its lower cost of capital compared to its pure play peers in those risky businesses. Do you agree with the company's CEO? Briefly describe your reasoning C. Pine Corp., a multi-divisional firm funded by 100% equity, is considering the following two independent projects. The risk-free rate is 3%, and the expected return on the market is 11%. The company's overall cost of capital is 10.5%, which project should be accepted and which project should be rejected? Show your analysis and briefly state your reasoning IRR 10.0% 12.0% Project Division Beta Utilities Retail 0.8