Question

The following three defense stocks are to be combined into a stock index in January 2019 (perhaps a portfolio manager believes these stocks are an appropriate benchmark for his or her performance). Assume the index is scaled by a factor of 10 million; that is, if the total value of all firms in the market is $5 billion, the index would be quoted as 500.

		Price
	Shares (millions)		1/1/19			1/1/20			1/1/21
Douglas McDonnell	545		$	80		$	83		$	98
Dynamics General	460			70			63			77
International Rockwell	190			99			88			102

PART 1

a. Calculate the initial value of the index if a value-weighting scheme is used. (Round your answer to 2 decimal places.)

	Index value

b. What is the rate of return on this index for the year ending December 31, 2019? For the year ending December 31, 2020? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

	2019 return % 2020 return %

PART 2

You are going to value Lauryn’s Doll Co. using the FCF model. After consulting various sources, you find that Lauryn's has a reported equity beta of 1.5, a debt-to-equity ratio of .4, and a tax rate of 21 percent. Based on this information, what is the asset beta for Lauryn’s?

	Lauryn’s asset beta

Answer 1

Q - 1

Part (a)

	N	P0	P1	P2	P0 x N	P1 x N	P2 x N
Douglas McDonnell	545	80	83	98	43,600	45,235	53,410
Dynamics General	460	70	63	77	32,200	28,980	35,420
International Rockwell	190	99	88	102	18,810	16,720	19,380
Total					94,610	90,935	108,210

the initial value of the index if a value-weighting scheme is used = Sum of (P0 x N) / Scaling factor = 94,610 / 10 = 9,461.00

Part (b)

2019 return = Sum (P1 x N) / Sum of (P0 x N) - 1 = 90,935 / 94,610 - 1 = - 3.88%

2020 return = Sum (P2 x N) / Sum of (P0 x N) - 1 = 108,210 / 94,610 - 1 = 14.37%

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Q - 2

Asset beta = Equity beta / [ 1 + (1 - T) x D/E] = 1.5 / [1 + (1 - 21%) x 0.4] = 1.14