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You work for the CFO of Alaska Airlines. The finance team is evaluating a new advertising campaign that is estimated to cost $5 million today and expected to generate $1 million of free cash flows per year for the next 10 years. Use Excel with the 10 years of monthly returns of ALK and S&P 500 in the table below to get the answers for Parts A and B.
A. Estimate the beta of Alaska Airlines by calculating the slope of the CAPM regression:
(1As is common in corporate finance offices, we are ignoring the risk-free rate in the regressions used to estimate beta, i.e., we are not using excess returns.)
Note that the y-variable is the monthly returns on the stock and the x-variable is the monthly returns on the market.
Verify that the beta of the S&P 500 is 1.
B. Using an expected market risk premium of 5% and the current yield on the 10-year Treasury bond of about 1.75%, determine the expected return of Alaska Airlines' stock.
C. Should your team approve the new marketing campaign? Why or why not?
Date
ALK Return
S&P 500 Return
01/31/2006
-0.106103
0.025467
02/28/2006
0.003758
0.000453
03/31/2006
0.106084
0.011065
04/28/2006
0.070804
0.012187
05/31/2006
0.020548
-0.030917
06/30/2006
0.017553
0.000087
07/31/2006
-0.058092
0.005086
08/31/2006
0.01993
0.021274
09/29/2006
0.004489
0.024566
10/31/2006
0.055468
0.031508
11/30/2006
0.024408
0.016467
12/29/2006
-0.03963
0.012616
01/31/2007
0.08481
0.014059
02/28/2007
-0.043174
-0.021846
03/30/2007
-0.070732
0.00998
04/30/2007
-0.223097
0.043291
05/31/2007
-0.014865
0.032549
06/29/2007
-0.044582
-0.017816
07/31/2007
-0.162599
-0.031982
08/31/2007
0.063866
0.012864
09/28/2007
-0.069702
0.035794
10/31/2007
0.100043
0.014822
11/30/2007
-0.002756
-0.044043
12/31/2007
-0.012633
-0.008628
01/31/2008
0.011595
-0.061163
02/29/2008
-0.035573
-0.034761
03/31/2008
-0.195902
-0.00596
04/30/2008
0.094801
0.047547
05/30/2008
-0.090782
0.010674
06/30/2008
-0.214542
-0.085962
07/31/2008
0.16558
-0.009859
08/29/2008
0.175056
0.012191
09/30/2008
-0.02951
-0.090791
10/31/2008
0.211378
-0.169425
11/28/2008
-0.07085
-0.074849
12/31/2008
0.27451
0.007822
01/30/2009
-0.098803
-0.085657
02/27/2009
-0.168816
-0.109931
03/31/2009
-0.198083
0.085405
04/30/2009
-0.044963
0.093925
05/29/2009
-0.07211
0.053081
06/30/2009
0.172768
0.000196
07/31/2009
0.26287
0.074142
08/31/2009
0.094102
0.03356
09/30/2009
0.061831
0.035723
10/30/2009
-0.03994
-0.019762
11/30/2009
0.162519
0.057364
12/31/2009
0.155853
0.017771
01/29/2010
-0.093171
-0.036974
02/26/2010
0.116784
0.028514
03/31/2010
0.178
0.058796
04/30/2010
0.004366
0.014759
05/28/2010
0.127747
-0.081976
06/30/2010
-0.037473
-0.053882
07/30/2010
0.14772
0.068778
08/31/2010
-0.142663
-0.047449
09/30/2010
0.153742
0.087551
10/29/2010
0.034685
0.036856
11/30/2010
0.041667
-0.00229
12/31/2010
0.030727
0.0653
01/31/2011
0.044982
0.022646
02/28/2011
0.003545
0.031957
03/31/2011
0.066779
-0.001047
04/29/2011
0.038631
0.028495
05/31/2011
0.025353
-0.013501
06/30/2011
0.013622
-0.018258
07/29/2011
-0.107216
-0.021474
08/31/2011
-0.055465
-0.056791
09/30/2011
-0.024944
-0.071762
10/31/2011
0.181915
0.107723
11/30/2011
0.043439
-0.005059
12/30/2011
0.081677
0.008533
01/31/2012
0.01385
0.043583
02/29/2012
-0.099304
0.040589
03/30/2012
0.044772
0.031332
04/30/2012
-0.056393
-0.007497
05/31/2012
0.014793
-0.062651
06/29/2012
0.046647
0.039555
07/31/2012
-0.029248
0.012598
08/31/2012
-0.037303
0.019763
09/28/2012
0.045008
0.024236
10/31/2012
0.090702
-0.019789
11/30/2012
0.117939
0.002847
12/31/2012
0.007953
0.007068
01/31/2013
0.07055
0.050428
02/28/2013
0.117494
0.011061
03/28/2013
0.240737
0.035988
04/30/2013
-0.036273
0.018086
05/31/2013
-0.078196
0.020763
06/28/2013
-0.084829
-0.014999
07/31/2013
0.176346
0.049462
08/30/2013
-0.071113
-0.031298
09/30/2013
0.10597
0.029749
10/31/2013
0.128394
0.044596
11/29/2013
0.103028
0.028049
12/31/2013
-0.056213
0.023563
01/31/2014
0.077688
-0.035583
02/28/2014
0.0989
0.043117
03/31/2014
0.076985
0.006932
04/30/2014
0.008252
0.006201
05/30/2014
0.049213
0.02103
06/30/2014
-0.034633
0.019058
07/31/2014
-0.074803
-0.01508
08/29/2014
0.056743
0.037655
09/30/2014
-0.060423
-0.015514
10/31/2014
0.222554
0.023201
11/28/2014
0.111309
0.024534
12/31/2014
0.012367
-0.004189
01/30/2015
0.13571
-0.031041
02/27/2015
-0.059231
0.054893
03/31/2015
0.039749
-0.017396
04/30/2015
-0.032034
0.008521
05/29/2015
0.012176
0.010491
06/30/2015
-0.003249
-0.021012
07/31/2015
0.175695
0.019742
08/31/2015
-0.009109
-0.062581
09/30/2015
0.061314
-0.026443
10/30/2015
-0.040277
0.082983
11/30/2015
0.048262
0.000505
12/31/2015
0.009783
-0.01753
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