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You have run a regression of returns of Devonex, a machine tool manufacturer against the S&P500 index using monthly returns over the last years and arrived at the following regression equation:

Return Devonex = 0.3% +1.6* ReturnS&P500

a) The stock had a Jensen’s alpha of – 0.1% (on monthly basis) over this period.

1) Has the stock beaten the market?

2) Estimate the monthly Rf during the last 5 years.

b) If the standard error of the regression beta is 0.5. Estimate the range for the regression beta at a 67% confidence interval.

c) If the market risk premium is 5.5%, the tax rate is 40% and Devonex’s bonds are A rated, and the default spread for A rated bond is 1%

1) Estimate the cost of equity.

2) Estimate the cost of debt.

3) Estimate the WACC for Devonex if the debt ratio is 30%.