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Finance Case

Autor:   •  March 12, 2012  •  Essay  •  305 Words (2 Pages)  •  1,634 Views

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We examine theses hypotheses (1) the market is the only factor and the expected return on the market portfolio is constant, (2) the market is the only factor and the expected return is generated by the regression model, (3) all of the expected factor returns are constant, (4) SMB is not a significant factor in the model, (5) HML is not a significant factor in the model, (6) MOM is not a significant factor in the model, and (7) the four factors in the FF model are uncorrelated. The time range of data is from 1953 to 2011. We test the hypotheses using in-sample (1953-1989) likelihood ratio tests and post-sample (1990-2011) t-test.

We use the spreadsheet FamaFrenchMom.xls to test the following hypotheses using in-sample likelihood ratio and post-sample t-tests. To point out, In-sample period is form 1953 to 1989 and post-sample period is from 1990 to 2011. And we use in-sample period data to build the model and use post-sample period data to test how does the model works.

From the lecture the professor gave us, we know that there are four factors in the FamaFrench Model. They are market (R_m-R_f), SML (R_s-R_b), HML (R_v-R_g) and momentum (Mom). GS10-1 and GS1 stand for different market environment. Thus, we can build four regression formulas.

6) Suppose that Mr. Dubinski has obtained from Blaine’s banker the quotes shown below for default spreads over 10-year Treasury bonds (note that these differ from the more general corporate bond yields shown in Exhibit 4.). What do these quotes imply about BKI’s cost of debt at the various debt levels and credit ratings? Compute BKI’s weighted average cost of capital at each of the indicated debt levels. What do your calculations imply about Blaine’s optimal capital structure? Based on these calculations, how many shares should Blaine purchase, and at what price?

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