SUMMARY OUTPUT Regression Statistics Multiple R 0868313283 R

SUMMARY OUTPUT

Regression Statistics

Multiple R

0.868313283

R Square

0.753967957

Adjusted R Square

0.740299511

Standard Error

8.769476742

Observations

20

ANOVA

df

SS

MS

F

Significance F

Regression

1

4242.101773

4242.101773

55.16120214

6.94512E-07

Residual

18

1384.267002

76.90372233

Total

19

5626.368775

Coefficients

Standard Error

t Stat

P-value

Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept

0.24635305

2.098289739

0.117406593

0.907838006

-4.16199011

4.65469621

-4.16199011

4.65469621

Excess rate of return Market

1.475039082

0.198603394

7.427058781

6.94512E-07

1.057788834

1.89228933

1.057788834

1.89228933

Using above output,

Assuming that the market return for the coming year is expected to be 12% and that the risk-free rate is expected to be 8 %, use market model (your regression model) to estimate the expected rate of return to the firm’s shareholders for the coming year.

(Hint: You will first need to calculate the expected excess rate of return for the market. To calculate the expected excess rate of return to the firm’s shareholders, you will then plug into the regression model estimated. You will also use the coefficient estimates estimated.)

SUMMARY OUTPUT
Regression Statistics
Multiple R	0.868313283
R Square	0.753967957
Adjusted R Square	0.740299511
Standard Error	8.769476742
Observations	20
ANOVA
	df	SS	MS	F	Significance F
Regression	1	4242.101773	4242.101773	55.16120214	6.94512E-07
Residual	18	1384.267002	76.90372233
Total	19	5626.368775
	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
Intercept	0.24635305	2.098289739	0.117406593	0.907838006	-4.16199011	4.65469621	-4.16199011	4.65469621
Excess rate of return Market	1.475039082	0.198603394	7.427058781	6.94512E-07	1.057788834	1.89228933	1.057788834	1.89228933

Solution

E( excess rate of return) = E(market return) - E(risk free rate)

= 0.12 - 0.08 = 0.04

E( rate of return) = 0.24635305 + 1.475039082×0.04

= 0.31 = 31%