CFTP Individual Assignment

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University of Technology Sydney *

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25743

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Finance

Date

Apr 24, 2024

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docx

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7

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25557 Corporate Finance: Theory and Practice Individual Assignment Written Report XXX 1. CAPM β Estimation: Complete this segment, download data from the Yahoo Finance website. Data should have the following specifications: Monthly frequency Start date: 1st Jan 2015 End date: 31st Dec 2022 (a) (5 marks) Download data on the following tickers: GM (firm), SPY (market portfolio proxy), TNX (risk-free rate). Merge the data on date (hint: Use VLOOKUP function in Excel).
(b) (5 marks) What is the estimated CAPM β. Report the regression output in the Excel spreadsheet. Provide a screenshot of the regression output in the report. - - - - - - - - - - -- - -- - -
(c) (2 marks) Interpret the CAPM β. 𝛽 (beta) measures the volatility of returns on a security relative to the market. This is especially helpful when determining good from bad investments as it determines the amount of systematic risk inherent with the stock. From the excel analysis, it shows that GM (General Motors) has a CAPM 𝛽 of 1.3961 (4d.p). This indicates that for every 1% the market moves, the security would move the equivalent of 1.3961% resulting in higher returns or losses. This is supported by the regression analysis completed on the historical data of the market, R f rate and GM prices. Whether this amount of systematic risk is desirable is decided individually by the investor. 2. Capital Structure To complete this segment, refer to the following financial information of GM, as of 31st December 2022. o There are 1.454 billion shares outstanding. o Short-term and long-term debt amounts are $38,778 million and $75,921 millions, respectively. o Last closing share price is $33.64. o Depreciation & amortization expenses are $11,276 million. o Earnings before interest and taxes are $10,314 million. o Marginal tax rate is 21% and the effective tax rate is 14.75%. o Government bond yield is 5%. (a) (5 marks) What is the WACC under the optimal capital structure suggested by the Excel spreadsheet analysis? Your answer is the baseline WACC figure. The WACC under the optimal capital structure is seen to be 8.21% within the excel when calculated. (b) (5 marks) In your baseline scenario, the expected market risk premium (MRP) is 7% and the government bond yield is 5%. However, you believe the MRP can be as 12% or as low as 5%. You also believe that the government bond yield can range from 2% to 7%. Analyse how sensitive the WACC is to your assumptions of the MRP (in increments of 0.5%) and the government bond yield (in increments of 1%). Provide a screenshot of your sensitivity analysis in the report.
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