Assignment 3

# Assignment 3 - Assignment 3 due by Monday at 16:00 GMT on...

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Assignment 3 – due by Monday, April 28, 2014 at 16:00 GMT on Turnitin 1. The following equation is reproduced from the study by Fama and French of returns between 1963 and 1990. Rt= 1.77 - 0.11 ln (MV) + 0.35 ln (BV/MV) where MV is the market value of equity in hundreds of millions of dollars and BV is the book value of equity in hundreds of millions of dollars. The return is a monthly return in %. a. Estimate the expected annual return on Lucent Technologies. The market value of its equity is \$ 240 million, and the book value of its equity is \$ 13.5 million. [10 marks] b. Lucent Technologies has a beta of 1.65. If the riskless rate is 6.5%, and the risk premium for the market portfolio is 7.5%, estimate the expected return using CAPM. [10 marks] c. Why are the expected returns different under the two approaches? [10 marks] 2. Storm Corp, an automotives parts manufacturer, currently has £30 million in outstanding debt and has 10 million shares outstanding. The book value per share is £10, while the market value is £ 22. The company is currently rated A, its bonds have a
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