Question

Anna is a Vice President at the J Corporation. The company is considering
investing in a new factory and Anna must decide whether it is a feasible
project. In order to assess the viability of the project, Anna must first calculate
the rate of return that equity holders expect from the company stock. The
annual returns for J Corp. and for a market index are given below. Currently,
the risk-free rate of return is				2.2%	and the market risk-premium is				4.6%	.

a) What is the beta of J Corp.'s stock?
(1 Mark)(Round your answer to two decimal places)
b) Using the CAPM model, what is the expected rate of return on J Corp. stock for the coming year?

Year	J Corp. Return (%)	Market Return (%)
1	-0.97	-0.30
2	13.97	9.66
3	18.38	12.60
4	18.38	12.60
5	-18.52	-12.00
6	24.59	16.74
7	37.04	25.04
8	19.06	13.05
9	4.43	3.30
10	15.47	10.66
11	-9.48	-5.97
12	-6.52	-4.00

Refer to Question 2. Now that Anna has determined an appropriate rate
of return for J Corp.'s stock, she must calculate the firm's Weighted Average
Cost of Capital (WACC). There are currently				55.2	Million
J Corp. common shares outstanding. Each share is currently priced at
$16.58	. As well, the firm has		8,000	bonds outstanding and each
bond has a face value of $10,000, a yield to maturity of					3.66%	and a
quoted price of		$10,266.00	. J Corp.'s tax rate is 30%.
J Corp. has no preferred shares outstanding.

What is J Corp.'s WACC?

Answer 1

Year	J stock return in %	market stock return in %
1	0.97	-0.3
2	13.97	9.66
3	18.38	12.6
4	18.38	12.6
5	-18.52	-12
6	24.59	16.74
7	37.04	25.04
8	19.06	13.05
9	4.43	3.3
10	15.47	10.66
11	-9.48	-5.97
12	-6.52	-4
standard deviation of J's stock =	Using stdev function in MS excel =stdev(cell reference year 0 J's stock return: cell reference year 12 J stock return)	15.92644
standard deviation of Market return =	Using stdev function in MS excel =stdev(cell reference year 0 market return: cell reference year 12 market return)	10.688702
standard deviation of J's stock	Using correl function in MS excel =correl(cell reference J's stock year 0 return,: cell reference J's stock Year 12 return, cell reference Market return year 0: cell reference market return year 12)	0.9994081
beta = (standard deviation J' stock/standard devaiation market return)*correlation	(15.926/10.6888)*.9999	1.49
expected rate of return on return	risk free rate+(market risk premium)*beta	2.2+(4.6)*1.49	9.05
after tax cost of debt	YTM*(1-tax rate)	3.66*(1-.3)	2.562
market value weight common stock	55.2*1000000*16.58	915216000
market value of debt	8000*10266	82128000
WACC
source	value	weight = value/total	cost of source of fund	cost of source*weight
debt	82128000	0.0823467	2.562	0.210972278
common stock	915216000	0.9176533	9.05	8.308432862
total	997344000
WACC in %= sum of cost * weight				8.52