Tag Archives: Cost of Capital

Estimating the risk of Apple’s automotive venture (will it ever happen?) 🧮

Apple is considering entering automotive industry. The analysts at Apple identified three pure plays: namely, Ford, General Motors, and Stellantis.

Determine the risk of this new project for Apple! Applicable tax rate is 35%! Use appropriate current yields on risk-free assets! Equity risk premium is estimated to be 7.4%. For all pure plays, proxy market is S&P 500.

Assume that Apple’s new project will be 100% equity-financed. Assess whether the value for the risk of this new project would make sense practically!

Estimating Betas: Real-world example #4 🧮

Estimate the beta of Tesla stock.

First, observe the time period from 2019 to 2023.

Then observe the time period from 2014 to 2018, as well as from June 29, 2010 (the day TESLA went public) to 2013.

Proxy market is S&P 500. Time interval is monthly.
Compare the betas you estimated!

Identify the industry Tesla operates in. Relying on that identification, use the industry-wide betas shared publicly. Compare that estimate to those you calculated in the first step above.

Estimating Betas: Real-world example #3 🧮

Calculate beta of the Walmart stock through regression analysis.

Time interval will be monthly and the time period to be observed will be last 5 years.

The proxy for the market portfolio will be S&P 500.

Estimating Betas: Real-world example #2 🧮

Calculate beta of the P&G stock!

Use the monthly returns for the last 5 years: i.e. 2019-2023.

S&P 500 will be the proxy for the market portfolio.

Lastly, regress P&G’s returns on the market returns and calculate beta that way for the monthly case!

Rely on publicly available data resources and compare your results with the values already calculated on these platforms! Explain the difference or the similarity!

Estimating Betas: Real-world example 🧮

Calculate beta of the Visa stock!

Use the monthly returns for the last 5 years.
S&P 500 will be the proxy for the market portfolio.
Lastly, regress Visa’s returns on the market returns and calculate beta that way for the monthly case! Rely on publicly available data resources and compare your results with the values already calculated on these platforms!

Explain the difference or the similarity!

Create an additional model for which every input value is the same except for market portfolio being NASDAQ!

Assume that Hyrule Electronics is an all-equity firm producing and marketing video game consoles and software. Hyrule has a beta of 1.35. The market risk premium is 7.2% and the risk-free rate is 3.5%.

There are three projects Hyrule is considering investment. Projects have the same beta as that of the firm. What should the discount rate be for these projects?

Also, each project requires an investment of $1,000,000 and lasts for a single year after the initial investment. Project A’s expected cash flows next year is $1,500,000, B’s $1,250,000, and C’s $1,050,000.

Calculate each project’s IRR and NPV!

Which projects should Hyrule invest considering that each project is independent? Plot the security market line (SML), label the regions within which you should accept or reject a project, also show each project on that plot!

Statistical modeling in corporate finance: Determining beta 🔮

As a statistical measure, beta estimation is prone to measurement error.

Which of the following inputs do affect beta estimates?

-Time period observed

-Time interval used

-Market portfolio against which the individual stock is benchmarked

-Whether close or adjusted close values are used