You Are an Analyst Looking at the Risk-Return Characteristics of XYZ

Essay

You are an analyst looking at the risk-return characteristics of XYZ Corporation.You decide to use the CAPM as your model for estimating risk.Using a regression of stock returns on market returns,you come up with the following regression equation: R_jt = 0.02 + 1.2 R_mt.
a. If the current riskless rate is 7% and the stock is currently selling for $50, what is your best estimate of the stock price a year from today? (Assume that the expected dividend per share next year is $2 and the market of return is 15%.)
b. The stock was selling for $54 a year ago. You have been asked to judge the performance of the stock over the last year. (Assume that the NYSE index declined from 150 to 145.5 over the same period, that the T-bill rate was 7% a year ago, and that the dividend per share last year was also $2.)
c. XYZ Corp. is considering the acquisition of ABC Co. for $25 million. You have estimated the beta for ABC Co. to be 2.0, and the correlation between XYZ and ABC stock returns to be 0.4. If XYZ goes through with the acquisition, what will its beta be afterwards? (There are one million shares of outstanding XYZ stock.)