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You have run a regression of returns of Devonex, a machine tool manufacturer against the S&P500 index using monthly returns over the last years and arrived at the following regression equation:

Return_Devonex = 0.2% +1.5* Return_S&P500

a) The stock had a Jensens alpha of -0.1% (on monthly basis) over this period.

1) Has the stock beaten the market? (1 mark)

2) Estimate the monthly Rf during the last 5 years. (2 marks)

b) If the standard error of the regression beta is 0.5. Estimate the range for the regression beta at a 95% confidence interval. (2 marks)

c) If the market risk premium is 6.5%, the tax rate is 40% and Devonexs bonds are A rated, and the default spread for A rated bond is 1.25%

1) Estimate the cost of equity. (1 mark)

2) Estimate the cost of debt. (2 marks)

3) Estimate the WACC for Devonex if the debt ratio is 20%. (2 marks)

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