You have just run a regression of monthly returns on MAD Inc., a newspaper and magazine publisher, against returns on the S&P 500, and arrived at the following result –
The regression has an R-squared of 22%. The current T.Bill rate is 5.5% and the current T.Bond rate is 6.5%. The riskfree rate during the period of the regression was 6%.. Answer the following questions relating to the regression –
a. Based upon the intercept, you can conclude that the stock did A. 0.05% worse than expected on a monthly basis, during the regression. B. 0.05% better than expected on a monthly basis during the period of the regression C. 1.25% better than expected on a monthly basis during the period of the regression. D. 1.25% worse than expected on a monthly basis during the period of the regression. E. None of the above. (1 point)
b. You now realize that MAD Inc went through a major restructuring at the end of last month (which was the last month of your regression), and made the following changes –
• The firm sold off its magazine division, which had an unlevered beta of 0.6, for $ 20 million.
• It borrowed an additional $ 20 million, and bought back stock worth $ 40 million. After the sale of the division and the share repurchase, MAD Inc. had $ 40 million in debt and $ 120 million in equity outstanding. If the firm’s tax rate is 40%, re-estimate the beta, after these changes.