23.03.2023 - 09:37

You have run a regression of monthly returns on TXBT, a large biotechnology firm, against monthly returns on the S&P 500 index, and come up with the following output.

Question:

You have run a regression of monthly returns on TXBT, a large biotechnology firm, against monthly returns on the S&P 500 index, and come up with the following output.

R stock = 2.34% + 1.77 x Market R2= 0.4

The current one-year Treasury bill rate is 3.3 and the current thirty-year bond rate is 8%. The firm has 132 million shares outstanding, selling for $73.36 per share. The short term equity risk premium is 5.1 and the long term equity risk premium is 7.7.

What is the expected return on this stock for a thirty year capital budgeting project? (Answer Format to two decimal places with no percentage sign, for example, for three percent: 3.00)

Answers (1)
  • Gangster1979
    April 2, 2023 в 07:22

    To calculate the expected return on this stock for a thirty-year capital budgeting project, we can use the capital asset pricing model (CAPM). The CAPM formula is:

    Expected return = Risk-free rate + Beta * Equity risk premium

    Where:

    • Risk-free rate: The return on a risk-free asset, typically a Treasury bill or bond.
    • Beta: The measure of the stock's volatility relative to the market, which we can obtain from the regression output.
    • Equity risk premium: The additional return required by investors to compensate for the risk of investing in stocks, which we can obtain from the question.

    Using the given information, we can calculate the expected return as follows:

    Risk-free rate = 8% Short-term equity risk premium = 5.1% Long-term equity risk premium = 7.7% Beta (from regression output) = 1.77

    Expected return = 8% + 1.77 * 7.7% Expected return = 20.44%

    Finally, we can convert the result to two decimal places with no percentage sign to obtain the expected return on this stock for a thirty-year capital budgeting project:

    Expected return = 20.44% Expected return = 20.44

    Therefore, the expected return on this stock for a thirty-year capital budgeting project is 20.44%.

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