medium · CFA Level I equity
Caldera Glass is a specialty manufacturer of architectural glass. It operates in a consolidated market where three firms control 80% of volume. Natural gas costs represent 40% of COGS, and the firm recently launched a proprietary coating allowing for a 15% price premium. Demand for the industry is growing at 3%, slightly above GDP. Caldera’s fixed-to-variable cost ratio is 60:40. To estimate the required return r_e, an analyst regresses Caldera’s monthly excess returns against the market excess returns, resulting in a slope of 1.40 and a standard error of 0.35.
Which statement best describes the use of this result in the valuation?
- The beta is exactly 1.40 and provides a point-estimate certainty for r_e.
- The market model intercept represents the stock's CAPM-implied risk.
- The beta of 1.40 should be adjusted toward 1.0 for future periods.
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