King City Inc. manufactures machine tools. The production planner who oversees the production of two of King City’s machines needs to determine how many of each to produce this month…..
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)