You are an intern with an investment fund and working hard to support your colleagues on various tasks. You are keen to demonstrate skills acquired from your finance course to increase the chance to be offered a permanent position. A colleague, Sanjay, is building a model to value Meridian Energy and needs your help to estimate the weighted average cost of capital (WACC). Common practice in this fund is to estimate beta by regressing 5-year monthly total returns to a stock on the monthly total returns to the NZX All index portfolio. However, Meridian has been listed for less than five years. Sanjay suggests that you estimate the equity beta of Contact Energy and use it to derive Meridian’s equity beta. Handing over a dataset that contains the adjusted closing prices of Contact Energy and the levels of NZX AllIndices at the monthly frequency over the past 5 years (see worksheet “Q1” in the Excel file FIN351_2016FC_Assignment2_Data.xlsx), Sanjay asks you to come up with the WACC estimation for Meridian and supply him the sources of information and workings. You are keen to prove that you can work independently on this task.
- Contact Energy’s Equity Beta. (5 marks).The Excel file contains three time series. They are adjusted closing prices on 27thof each month of Contact Energy,the NZX All price index and the NZX All total return indexover the past five years, sourced from Datastream. Both the adjusted closing price series and the total return index series include dividends declared during each period. Choose the correct index series to derive the return to the market portfolio, as well as deriving the total return to holding Contact Energy shares. Then, estimate the equity beta of Contact Energy using two different methods. Method one is regression analysis. Method two is fitting a straight line on a plot chart with the equation showing. Print out the regression output and the plot chart and attach them to your solution as Appendix 1(1).Record your answers to four decimal places. Write down your final answer in the cell below.
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