The following table shows estimates of the risk of two well-known Canadian Stock
ID: 2612226 • Letter: T
Question
The following table shows estimates of the risk of two well-known Canadian Stocks:
Given the projections in the Table 10.8, in one- to –two pages, calculate the NPV and interpret your results.
In one –to –two pages, construct a sensitivity and a scenario analysis of the project and explain what these analyses reveal about the project's risks and potential value to the firm.
Standard
Deviation, %
Standard
Error of Beta
Standard
Deviation, %
R2 BetaStandard
Error of Beta
Toronto Dominion Bank 25 .66 1.26 .09 Research in Motion 44 .08 .82 .25Explanation / Answer
Answer:
The R2 value for Toronto Dominion Bank was 0.66, which means that 66% of total risk comes from movements in the market (i.e., market risk). Therefore, 34% of total risk is unique risk.
The R2 value for Research in Motion was 0.08, which means that 18 of total risk comes from movements in the market (i.e., market risk). Therefore, 92% of total risk is unique risk.
The variance of Toronto Dominion Bank is: (25)2 =625
Market risk for Toronto Dominion Bank: 0.66 × 625 = 412.5
Unique risk for Toronto Dominion Bank: 0.34 × 625 = 212.5
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