BUS321 Advance Corporate Finance and Modeling Prof. Meng Mini Case 1: Wal-Mart (WMT)s Beta 1. Get Data a. I will provide you the historical monthly stock prices for Wal-Mart (WMT) for at least 60 months (January 2009 September 2014). b. For the historical risk-free rate, go to St. Louis Federal Reserve Web site (www.stlouisfed.org) and find the three-month Treasury bill secondary market rate. Download this file. Note that the risk-free rate (3-month T-bill rate) is expressed as an annual rate. It is necessary to find the monthly rate, so this rate is divided by 12. Get the historical risk-free rate for the matching periods. c. Also on www.stlouisfed.org, download the ending value of the S&P 500 index over the same period. Questions: What are the monthly returns, average monthly returns, and standard deviations for Wal-Mart stock, the three-month Treasury bill and the S&P 500 for this period? 2. Model Beta is often estimated by linear regression. A model often used is called the market model, which is: In this regression, Rt is the return on the stock and Rft is the risk-free rate for the same period. Rmt is the return on a stock market index such as the S&P 500 index. i is the regression intercept, and i is the slope (and the stocks estimated beta). i represents the residuals for the regression. Questions: 1) What do you think is the motivation for this particular regression? 2) The intercept, i, is often called Jensens alpha. What does it measure? If an asset has a positive Jensens alpha, where would it plot with respect to the SML? 3) What is the financial interpretation of the residuals in the regression? 3. Regression a. Use the market model to estimate the beta for Wal-Mart using the last 36 months of returns (the regression procedure in Excel is one easy way to do this). Plot the monthly returns on Wal-Mart against the index and also show the fitted line. b. When the beta of a stock is calculated using monthly returns, there is a debate over the number of months that should be used in the calculation. Rework the previous questions using the last 60 months of returns. Questions: 1) How does this answer compare to what you calculated previously? What are some arguments for and against using shorter versus longer periods? 2) Also youve used monthly data, which are a common choice. You could have used daily, weekly, quarterly, or even annual data. What do you think are the issues here? 4. Compare your beta for Wal-Mart to the beta you find on finance.yahoo.com. How similar are they? Why might they be different.

1 Date Open High Lw lose Volume Adj Close 2 1/26/09 48.64 49.64 46.92 47.12 2425400 41 3 2/2/09 46.57 50.67 46.25 49.24 28740042.85 4 3/2/09 48.81 5 4/1/09 51.38 54.57 47.64 50.4 22551300 44.1 6 5/1/09 50.5 51.38 48.12 49.74 1949440043.76 7 6/1/09 50.18 51.75 48.02 48.44 19751700 42.62 8 7/1/09 48.55 50.43 47.3549.88 1744230043.88 9 8/3/09 50.22 52.56 48.75 50.87 17214000 10 9/1/09 50.81 52.148.7349.09 1841100 43.43 11 10/1/09 49.07 12 11/2/09 49.81 55.09 49.52 54.55 1589690048.26 13 12/1/09 54.85 55.08 52.3153.45 12474800 47.52 14 1/4/10 53.74 55.252.5153.43 1624800 47.5 15 2/1/10 53.62 54.5 52.654.07 157048.07 16 3/1/10 54.04 56.27 53.1555.6 12205700 49.71 17 4/1/10 55.7555.9 53.52 53.64 14249000 47.96 18 5/3/10 53.88 54.95 19 6/1/10 50.8 52.08 48.0148.07 1858800 43.23 20 7/1/10 48.1 51.81 47.7751.19 13994800 46.03 21 8/2/10 51.55 52.48 22 9/1/10 50.49 54.39 50.4653.52 10818300 48.41 23 10/1/10 53.6 54.82 52.9354.17 10308400 24 11/1/10 54.05 55.72 53.43 54.09 1235040048.93 25 12/1/10 54.42 55.34 53.1453.93 11512500 49.05 26 1/3/11 54.23 57.9 53.5456.07 13817200 27 2/1/11 56.37 56.73 51.51.98 15512600 47.28 28 3/1/11 52.16 53.88 50752.05 1261500047.67 29 4/1/11 52.25 55.165.54.98 939040050.36 5 47 52.1 25748800 45.59 45 52 48.73 49.68 178240043.95 50 50.56 20606900 45.47 2 50 50.14 13541700 45.35 49 51 1 Date Open High Lw lose Volume Adj Close 2 1/26/09 48.64 49.64 46.92 47.12 2425400 41 3 2/2/09 46.57 50.67 46.25 49.24 28740042.85 4 3/2/09 48.81 5 4/1/09 51.38 54.57 47.64 50.4 22551300 44.1 6 5/1/09 50.5 51.38 48.12 49.74 1949440043.76 7 6/1/09 50.18 51.75 48.02 48.44 19751700 42.62 8 7/1/09 48.55 50.43 47.3549.88 1744230043.88 9 8/3/09 50.22 52.56 48.75 50.87 17214000 10 9/1/09 50.81 52.148.7349.09 1841100 43.43 11 10/1/09 49.07 12 11/2/09 49.81 55.09 49.52 54.55 1589690048.26 13 12/1/09 54.85 55.08 52.3153.45 12474800 47.52 14 1/4/10 53.74 55.252.5153.43 1624800 47.5 15 2/1/10 53.62 54.5 52.654.07 157048.07 16 3/1/10 54.04 56.27 53.1555.6 12205700 49.71 17 4/1/10 55.7555.9 53.52 53.64 14249000 47.96 18 5/3/10 53.88 54.95 19 6/1/10 50.8 52.08 48.0148.07 1858800 43.23 20 7/1/10 48.1 51.81 47.7751.19 13994800 46.03 21 8/2/10 51.55 52.48 22 9/1/10 50.49 54.39 50.4653.52 10818300 48.41 23 10/1/10 53.6 54.82 52.9354.17 10308400 24 11/1/10 54.05 55.72 53.43 54.09 1235040048.93 25 12/1/10 54.42 55.34 53.1453.93 11512500 49.05 26 1/3/11 54.23 57.9 53.5456.07 13817200 27 2/1/11 56.37 56.73 51.51.98 15512600 47.28 28 3/1/11 52.16 53.88 50752.05 1261500047.67 29 4/1/11 52.25 55.165.54.98 939040050.36 5 47 52.1 25748800 45.59 45 52 48.73 49.68 178240043.95 50 50.56 20606900 45.47 2 50 50.14 13541700 45.35 49 51