merqz1 - Intercept - 1.18% (1-1.50) = 7.19% Solving for the...

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Problem 1 a. Management power increases. Board will become more CEO compliant. b. Stockholder power increases. New directors are likely to be stockholder focused. c. Management power increases. Hostile takeovers operate as a disciplinary mechanism. Problem 2 Quarterly Excess Return = (1.32) 1/4 -1 = 7.19% ! Okay if you use 8% as quarterly excess return Intercept - Riskfree Rate (1-Beta) = Excess Return Quarterly Riskfree Rate=(1.048) 1/4 -1 = 1.18% !Again, okay if you use 1.2% as you quarterly riskfree rate
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Unformatted text preview: Intercept - 1.18% (1-1.50) = 7.19% Solving for the intercept, Intercept = 7.19% + 1.18% (1-.5) = 6.60% Problem 3 0.70 (Raw Beta) + 0.30 (1.00) = 1.70 Raw Beta = 2.00 Range on Beta = 1.65-2.35 Problem 4 Current Beta = 1.20 Assets 100 Equity 100 Unlevered Beta = 1.20 ! There is no debt After the transaction, Assets 100 Debt 40 Equity 60 Debt/Equity Ratio = 40/60 = 0.67 New Beta = 1.20 (1 + (1-0.4)(0.67)) = 1.68 Assets Liabilities Assets Liabilities...
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