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1) What is the statistical interpretation of Beta?

2) What is the financial theory interpretation of Beta?

3) What is the statistical interpretation of R2

4) What is the financial theory interpretation of R2

5) Does the R2 seem reasonable? Why?

6) What is the Yahoo Beta for P&G? Expalin any difference.

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Nestor Rutherford
Nestor RutherfordLv2
29 Sep 2019

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Question Variable - Parameter Coefficients Standard Errors t-Statistics Intercept - α 1.5237 0.6321 2.4108 (Mkt-RF)t - β 1.1462 0.1450 7.9023 SMBt - βSMB 0.3164 0.2107 1.5015 HMLt - βHML -0.8347 0.2236 -3.7323 Adjusted R2 0.2557 F-ratio 39.7390 Number of observations 351 Durbin-Watson 1.8941 a) Interpret the model from a financial perspective. That is, what are these four estimated coefficients telling you about Apple’s systematic stock market performance? Does each make theoretical and intuitive sense? Explain your answers. (Note that a non-zero intercept (alpha (α)) denotes the presence of arbitrage opportunities.) b) Comment briefly on the statistical significance of the intercept and each of the independent variables as indicated by their t-ratios and on the statistical significance of the model as a whole as indicated by the F-ratio. What is the interpretation of R2? Running this regression model results in a beta (β) value of 1.3596, an R2 of 0.2106 and an F-ratio of 93.1237. 1) Has there been any appreciable gain in predictive power with the three factor model? (In other words, did the three factor model do a better job than CAPM of predicting Apple’s stock price?) 2) Conduct a t-test on the null hypothesis that beta (β) truly equals 1.3596 given the above estimate of 1.1462 and its standard error of 0.1450. (This is basically asking whether or not the Beta estimated by each model are statistically different from one another.) 3) Finally, comment on the CAPM intercept term of 1.2041 which is statistically different from zero. What are the financial or practical implications for investors? Variable - Parameter Coefficients Standard Errors t-Statistics Intercept – α 1.2041 0.6432 1.8720 (Mkt-RF)t – β 1.3596 0.1409 9.6501 h) For January 2014, the actual value of (Mkt-RF) was minus 3.26% (-3.26), SMB was plus 0.85% (+0.85) and HML was minus 1.83% (-1.83). Given the three factor regression output at the beginning of this document and the actual January values for the variables here, what does the model predict for Apple’s excess return (RAAPL-RF) in January? How does that compare to the actual value for (RAAPL-RF) which was minus 10.77% (-10.77) for January 2014? Is the difference statistically significant?

I need help with this problem i have. The company I chose was apple because i figured it would be the easiest. I know i listed the formulas, but i cant find any of the numbers. Can anyone possibly help? I need to know what numbers go in what formula.

Much appreciated.

Company Valuation

1. Analysis of WACC

a. Calculation of WACC for your company:

You will need to identify each component of the WACC formula and calculate the overall WACC.

The WACC formula for a company that uses debt and equity is as follows:

WACC = % Debt * Cost of Debt * (1 - Tax Rate) + % Equity * Cost of Equity

*You should use Yahoo! Finance and / or the company's most recent 10K report to identify all financial statement inputs. You can use the following guide for the inputs. The specific financial statement data are found on the relevant financial statement. Debt = Long-term Debt + Short-term Debt (on Yahoo! this is called, "Short/Current Long Term Debt")

Equity = Market Cap. (This is on the Key Statistics page in Yahoo! Finance)

% Debt = Debt / (Debt + Equity)

% Equity = 1 - % Debt

Cost of Debt = Interest Expense / Debt

Tax Rate = Income Tax Expense / Income Before Tax

Cost of Equity: Use the CAPM equation to calculate this

Cost of Equity = Risk free rate + Beta * (Market Risk Premium)

Risk free rate: look up the yield on 10 year US Treasury bonds

Beta: This is on the Key Statistics page in Yahoo! Finance

Market Risk Premium: Assume 11% minus the risk-free rate

b. Interpretation of WACC for Your Company

*Indicate what the WACC value you derived means for your company.

*What role does the WACC play for company managers when they are evaluating new projects to undertake?

*How would company managers and investors use the WACC for an overall company valuation analysis?

Use the Excel Template and the table of prices and dividendsbelow to answer the next seven questions:

Kellogg

Ticker = K

S&P 500

Month

Dividend

Price

Price

Jan-17

72.71

2278.87

Feb-17

74.07

2363.64

Mar-17

0.52

72.61

2362.72

Apr-17

71

2384.2

May-17

0.52

71.6

2411.8

Jun-17

69.46

2423.41

Jul-17

68

2470.3

Aug-17

0.54

65.46

2471.65

Sep-17

62.37

2519.36

Oct-17

62.53

2575.26

Nov-17

0.54

66.16

2584.84

Dec-17

67.98

2673.61

Jan-18

68.11

2823.81

Feb-18

66.2

2713.83

Mar-18

0.54

65.01

2640.87

Apr-18

58.9

2648.05

May-18

0.54

64.39

2705.27

Jun-18

69.87

2718.37

Jul-18

71.03

2816.29

Aug-18

0.56

71.79

2901.52

Sep-18

70.02

2913.98

Oct-18

65.48

2711.74

Nov-18

0.56

63.65

2760.17

Dec-18

59.23

2545.94

1. (EXCEL TEMPLATE)Calculate monthly returns for Kellogg (K) and the S&P 500. Besure to include the dividends for Kellogg in the return.

2. (EXCEL TEMPLATE)Calculate the average, standard deviation, and variance of returnsfor Kellogg (K) and the S&P 500.

3. (EXCEL TEMPLATE)Use the covariance equation to find the covariancebetween Kellogg (K) and the S&P 500.

4. (EXCEL TEMPLATE)Use the correlation coefficient equation to findthe correlation coefficient between Kellogg (K and the S&P500.

5. (EXCEL TEMPLATE) Use the betaequation to find the beta of Kellogg (KY).

6. (EXCEL TEMPLATE)Use Regression Analysis to find the beta for Kellogg (you shouldget the same answer as in question 5).

7. (EXCELTEMPLATE)

a. Whatis the probability that the true beta for Kellogg is equal tozero?

b. If the market risk premium is 6%and the risk-free rate is 3%, what return would you expect to earnon Kellogg given YOUR beta calculation?

c. Go to the website for Yahoo Financeand to the Profile tab. List two products the company makes.

d. Go to the website for Yahoo Financeand to the Summary tab. What beta is listed?

e. Give a possible reason for why yourcalculated beta is different than the Yahoo beta.

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