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You have just done a regression of monthly stock returns of Royal Inc

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You have just done a regression of monthly stock returns of Royal Inc., on monthly market returns over the past five years and have come up with the following regression:

" =0.03+1.4× +

The variance of the stock is 50%, and the variance of the market is 20%. The current risk-free rate is 3% (it was 5% one year ago) and the market risk premium is 8.76%. The stock is currently selling for $50, down $4 over the past year; it has paid a dividend of $2 during the past year and expects to pay a dividend of $2.50 over the next year. Royal Inc. has a tax rate of 40%. Estimate the expected return on the stock.

 

Royal Inc. has $100 million in equity and $70 million in debt. It plans to issue $50 million in new equity and retire $70 million in debt. Estimate the new beta.

A. 0.88

B. 0.90

C. 0.92

D. 0.98