You have just done a regression of monthly stock returns of HeavyTech Inc., a manufacturer of heavy machinery, on monthly market returns over the last five years and come up with the following regression:

R_HeavyTech= 0.5% + 1.2 RM

The variance of the stock is 50% and the variance of the market is 20%. The current T.Bill rate is 3% (It was 5% one year ago). The stock is currently selling for $50, down $4 over the last year, and has paid a dividend of $2 during the last year and expects to pay a dividend of $2.50 over the next year. The NYSE composite has gone down 8% over the last year, with a dividend yield of 3%. HeavyTech Inc. has a tax rate of 40%.

• a. What is the expected return on HeavyTech over the next year?
• b. What would you expect HeavyTech's price to be one year from today?
• c. What would you have expected HeavyTech's stock returns to be over the last year?
• d. What were the actual returns on HeavyTech over the last year?
• e. HeavyTech has $100 million in equity and $ 50 million in debt. It plans to issue $50 million in new equity and retire $50 million in debt. Estimate the new beta.