10 Charcoal corporation

value of common stock, E 20 million

value of risk-free debt, D 5 million
beta 1.25
risk premium 8%
treasury bill rate, Rd 5%
Total Value, V 25 million
cost of equity, Re 15%
WACC 13%

11 Calculation of Beta SUMMARY OUTPUT

Y X
A's return market return Regression Statistics
year-1 6% 10% Multiple R
year-2 15% 10% R Square
year-3 15% 16% Adjusted R Square
Standard Error
Beta 0.75 Observations

ANOVA

Regression
Residual
Total

Intercept
market return

12 Golden Fleece Financial

long term debt, D 370,000

Rd 10%
No. of shares 13,500
Price /share 50.7
book value/share 32
Re 17%
Value of stock, E 684,450
Total Value, V 1,054,450

WACC, cost of capital 14.54%

13 Nero Violins
Security Beta Total market value (in millions)
Debt 0 108
Preferred stock 0.28 48
Common stock 1.28 307
463
a. Firm's asset beta 0.878

b. Discount rate calculation

risk free rate 5%
risk premium 6%
beta 0.878
discount rate 10.27%

14 Calculation of WACC

Risk-free debt % 45%

Equity % 55%
cost of debt, Rd 10%
risk premium 8%
beta 55%
tax rate 34%
cost of equity, Re 14.4%
WACC 10.89%

15 Binomial Tree farm

Debt, D 7.1 million

Equity on annual report 6.87 million
No. of shares 420000
stock price 16.3
Market value of equity, E 6.85 million
Total Value, V = D+E 13.95 million
Debt ratio 50.91%

16
Std dev(%) R^2 Beta SE of beta
sun life financial 18.7 0.12 0.88 0.11
Loblaw 25.5 0.03 0.28 0.2

a. What proportion of each stock’s risk was market risk, and what proportion was specific risk?
sun life loblaw
market risk 12% 3%
specific risk 88% 97%
b. What is the variance of the returns for Sun Life Financial stock? What is the specific variance?
sun life
Variance 349.7
Specific Variance 307.7

Note:
Variance in stock returns due to market = Variance X R^2
Variance in stock returns due to specific/unique risks = Variance x(1-R^2)

c. What is the confidence interval on Loblaw's beta?

Loblaw Note: How to set up confidence interval?

Beta 0.28 confidence interval : beta +- Z(Std error)
Standard error of beta(SE) 0.2 Z-value : depends on confidence level
Z-value 1.96 (for 95% confidence level)
Lower limit -0.11
Upper limit 0.67

d. If the CAPM is correct, what is the expected return on Sun Life? Assume a risk-free interest rate of 3% and an expecte

risk-free rate, Rf 3%
market return, Rm 11%
risk premium 8%
Beta 0.88
Exp return on sun life 10.04%
(cost of equity)

3. Suppose that next year, the market provides a 16% return. Knowing this, what return would you expect from Sun Life

risk-free rate, Rf 3%
market return, Rm 16%
risk premium 13%
Beta 0.88
Exp return on sun life 14.44%
(cost of equity)

17 (PENDING)

Revenue/year 32 million
Raw material cost 16 million
cost of capital, wacc 13%
cost of debt, Rd 10%
egression Statistics
0.5
0.25
-0.5
0.06363961
3

df SS MS F Significance F
1 0.00135 0.00135 0.333333 0.666667
1 0.00405 0.00405
2 0.0054

Coefficients Standard Error t Stat P-value Lower 95%Upper 95%Lower 95.0%

Upper 95.0%
0.03 0.16015617378 0.187317 0.882116 -2.004977 2.064977 -2.004977 2.064977
0.75 1.29903810568 0.57735 0.666667 -15.75584 17.25584 -15.75584 17.25584
et up confidence interval?
: beta +- Z(Std error)
n confidence level

ate of 3% and an expected market return of 11%

you expect from Sun Life?

Hurdle rate = Minimum rate of return on a project/investment