4. You estimated the beta of Monster Inc. stock by regressing the total returns

Question

4. You estimated the beta of Monster Inc. stock by regressing the total returns to the stock on the total returns to the market portfolio using the following linear regression model (Ri - r)-ai+b(RMkt-r)+ ei The summary output from your regression is shown below CoefficientsS. E. t-Stat P-value 0.79 0.01 Lower 95% Intercept X Variable 1 0.0009 0.7500 0.00 0.28 0.27 2.67 0.01 0.19 Upper 95% 0.01 1.29 Monster Inc's closing stock price is $5 and number of shares outstanding is 100 million as of 29th Oct 2016. Company Maleficent and Monster Inc. run similar businesses but differ in leverage. Monster Inc's latest balance of interest bearing debt is $100 million and that of cash and cash equivalent is $250 million. Maleficent is not listed and it intends to maintain a leverage ratio of 10% (net debt/ (net debt + market capitalisation). Assume that debt betas are zero for both firms. The equity beta of Maleficent is closest to

Explanation / Answer

Beta for a stock is same as the value of X variable 1 under the coefficients column. So the beta will be closest to 0.75

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