Estimate the cost of equity.

Please fill your answer in the blank box found below: 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: ReturnDevonex = 0.3% +1.6* ReturnS&P500 a) The stock had a Jensen’s 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 67% confidence interval. (2 marks) c) If the market risk premium is 5.5%, the tax rate is 40% and Devonex’s bonds are A rated, and the default spread for A rated bond is 1% 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 30%. (2 marks)

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