Question

In: Statistics and Probability

Fundamental Toys Inc. is looking to expand its stock portfolio. You receive an urgent text message...

Fundamental Toys Inc. is looking to expand its stock portfolio. You receive an urgent text message from Bob: I need you to analyze a Stock X as a possible investment candidate for the company's stock portfolio. The CFO has asked me to make a decision ASAP. I left the data you need on your desk. Fortunately, Excel has the capability of performing regression analysis with built-in algorithms. This frees the analyst from complicated algebraic formulations and data management. The following data has been collected to help you run a linear regression between Stock X and the New York Stock Exchange (NYSE) on which Stock X is traded. Use CAPM as the investment decision model. Data from Bob Historical Rates of Return Year NYSE Stock X 1 (30%) (19.0%) 2 32.5 20.5 3 21.6 16.5 4 (9.8) 0.5 5 7.8 9.7 6 22 20.5 7 33.5 19.8 (Source: Intermediate Financial Management, Brigham and Davies, 10th edition) The NYSE is the independent variable, X-axis, which is the proxy market portfolio. Stock X is the dependent variable, Y-axis. Also, assume a market return (NYSE) of 12%, the risk-free rate of 4% and the market return of Stock X of 7.85%. Submit the following items in to the online drop box. 1.The Excel regression function (the regression equation). 2.The SML constructed from the risk-free rate, beta (slope of the regression function), and the market return provided above. 3.Your conclusion on the stock purchase given your CAPM analysis and the market return of Stock X. Provide support for your decision.

Solutions

Expert Solution

(a) the regression equation y=1.6572+0.6037x

(b) slope of the regression is 0.6037

for x=12, y=1.6572+0.6037*12=8.9016

for x=4, y=1.6572+0.6037*4=4.072

for x=7.85, y=1.6572+0.6037*7.85=6.3962

(c) since p-value=0.0184 of the regression is less than typical value of level of significance alpha=0.05, so model is significant and we can use this SML

following regression analysis information has been generated using ms-excel

SUMMARY OUTPUT
Regression Statistics
Multiple R 0.838571793
R Square 0.703202652
Adjusted R Square 0.643843182
Standard Error 4.491197678
Observations 7
ANOVA
df SS MS F Significance F
Regression 1 238.9542885 238.9543 11.84651 0.018398092
Residual 5 100.8542829 20.17086
Total 6 339.8085714
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept 1.65718276 4.289084754 0.386372 0.715116 -9.368260596 12.68262612
X 0.603687791 0.175394976 3.441876 0.018398 0.152820652 1.054554929

following data has been used as , x is independent and y is dependent variable in the regression analysis

NYSE(x) Stock_X(y)
30 19
32.5 20.5
21.6 16.5
9.8 0.5
7.8 9.7
22 20.5
33.5 19.8

Related Solutions

Imagine you receive a phone call/text message from anactual friend or relative who asks you,...
Imagine you receive a phone call/text message from an actual friend or relative who asks you, “HOW IS YOUR ONLINE SCHOOL GOING?” Write a two-paragraph email to your instructor (Ms. Ivy) identifying how you will respond to the specific audience:In the first paragraph, identify the friend or relative you have in mind and explain what you think that person really wants to know in asking the question.In the second paragraph, explain how you will respond. What will you tell your...
Have you ever sent a text message that revealed your most intimate of thoughts and emotions?  Text...
Have you ever sent a text message that revealed your most intimate of thoughts and emotions?  Text messages are often raw, unvarnished, and immediate, not to mention can be taken completely out of context. However, we send them to those who are expected to guard them from publication. The status of text messages in criminal investigations remains unsettled in the US. Is it reasonable for people to expect the contents of their electronic text messages to remain private, especially from law...
Urgent You want to value the stock of Tech Apps, Inc. The company has never paid...
Urgent You want to value the stock of Tech Apps, Inc. The company has never paid a dividend before and is planning to ramp up its dividends over the next few years. The first dividend, to be paid one year from today, will be $1.25. The next four dividends will each be $0.50 higher than the preceding dividend (i.e., $1.75 in year 2, $2.25 in year 3, etc, up to year 5). After that, the company expects to maintain a...
Yup Inc. is a large grocery retailer looking to expand their reach by offering their customers...
Yup Inc. is a large grocery retailer looking to expand their reach by offering their customers the option of grocery shopping online. The business serves a wide range of customers, and offers more than 1,000 items in 15 locations across Alberta. You have been hired as the project leader to develop their e-commerce system. The CEO needs to know the options available for building the e-commerce site and what technologies should be adopted.   Consider your options for building the site...
Dysxa Co is looking to expand the capacity of an existing factory in its Alpha Division...
Dysxa Co is looking to expand the capacity of an existing factory in its Alpha Division by 850,000 units per year in order to meet increased demand for one of its products. The expansion will cost $3.2 million. The selling price of the product is $3.10 per unit and variable costs of production are $1.10 per unit, both in current price terms. Selling price inflation of 3% per year and variable cost inflation of 6% per year are expected. Nominal...
Ulta Beauty is looking to expand its operations by 10% of the firm's net property, plant,...
Ulta Beauty is looking to expand its operations by 10% of the firm's net property, plant, and equipment.Calculate this amount by taking 10% of the property, plant, and equipment. ($1,205,524) The estimated live of this new property, plant, and equipment will be 12 years. The salvage value of the equipment will be 5% of the property, plant and equipment's cost. The annual EBIT for this new project will be 18% of the project's cost. The company will use the straight...
Look at your phone and find the most recent text message you received. How is this...
Look at your phone and find the most recent text message you received. How is this utterance part of a larger chain? How do distant and nearby discourses give it meaning? How about already-spoken and not-yet-spoken discourses?
(b) Eir-Tel, Inc. is a telecommunication services provider looking to expand to a new territory Z....
(b) Eir-Tel, Inc. is a telecommunication services provider looking to expand to a new territory Z. It is analyzing whether it should install its own telecom towers or lease them out from a prominent tower-sharing company X-share, Inc. Leasing out 100 towers would involve payment of €5,000,000 per year for 5 years. Erecting 100 new towers would cost €18,000,000 including the cost of equipment and installation, etc. The company has to obtain a long-term secured loan of €418,000,000 at 5%...
You are the business development manager for Flipkart (India) which is now looking to expand in...
You are the business development manager for Flipkart (India) which is now looking to expand in Thailand. Based on the Hofstede’s dimensions what would be some of the cultural challenges in successfully running the business in Thailand? Identify and justify any two major changes that Flipkart will need to make in its business model prior to launching in Thailand.
Prompt You are the Operations Manager for a technology company. Your company is looking to expand...
Prompt You are the Operations Manager for a technology company. Your company is looking to expand its product line and in doing so it will need a larger or even second location. What considerations are taken into account for determining which solution is best? When you decide the solution how do you secure the property? Would any other item needed to expand the product line be considered real property?  
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT