Question
Historical Estimates of the Cost of Equity for U.S. Stocks. Obtain the historical annual returns of the S&P 500 from Professor Damodarans website (see Module
Historical Estimates of the Cost of Equity for U.S. Stocks. Obtain the historical annual returns of the S&P 500 from Professor Damodarans website (see Module 1 for the relevant websites) and its earnings from the earnings estimates spreadsheet you downloaded last week from S&Ps website.
a. Estimate the cost of equity for the market in 1999 by compounding the historical returns of the S&P 500 from 1930. What is the standard error of your estimate?
b. How does your estimate compare with the EBO based estimate described in equation (38)? Assume that you knew the earnings of the S&P 500 in 2000 at the end of 1999.
c. What is the yield of the ICE BoFA US Corporate Index (get the data from the Federal Reserves FRED database) at the end of 1999? How large is the gap between your estimates of the cost of equity for the market and the cost of debt as proxied by the ICE BoFA US Corporate Index?
d. What was the actual realized return of the S&P 500 from 12/31/1999 to 12/31/2009?
NOTE- PROVIDE EXPLANATION FOR EACH AND EVERY SINGLE STEPS. ALSO PLEASE PROVIDE THE FORMULA
e. What was the actual realized return of the ICE BoFA US Corporate Index from 12/31/1999 to 12/31/2009?
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