Question 1

You have just done a regression of monthly stock returns of Royal Inc., on monthly market returns

over the past five years and have come up with the following regression:

"=0.03+1.4+

The variance of the stock is 50%, and the variance of the market is 20%. The current risk-free rate is 3% (it was 5% one year ago) and the market risk premium is 8.76%. The stock is currently selling for $50, down $4 over the past year; it has paid a dividend of $2 during the past year and expects to pay a dividend of $2.50 over the next year. Royal Inc. has a tax rate of 40%.

Estimate the expected return on the stock.

A. % 13.51 B. % 15.26 C. % 17.12 D. % 18.2

Question 2

Given information in Q1, how much do you expect Royal Inc. price will be one year from now after ex-dividend date?

A. $55.13 B. $54.25 C. $57.63 D. $56.75

Question 3

Given the information in Q1, what would you have expected for Royal Inc. return over the past year.

A. % 19.41 B. % 18.12 C. % 17.26 D. % 15.51

Question 4:

Royal Inc. has $100 million in equity and $70 million in debt. It plans to issue $50 million in new equity and retire $70 million in debt. Estimate the new beta.

A. 0.88 B. 0.90 C. 0.92 D. 0.98