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Calculating and interpreting abnormal returns:
In a closely contested lawsuit, Apex sued Bpex for patent infringement. On the day of the decision was announced, the rates of return on the two companies was rA = 1.6% and rB = 1.5%, while the market return was rM = 1.5%. The market responded to good news about the unemployment rate.
You have estimated the following index models for the relationship between stock returns and market returns for these two stocks:
rA - rf = 1.2(rM - rf) + eA
rB - rf = 0.8(rM - rf) + eB
a. Assuming that over a one day period the risk free rate is equal to zero, what are the abnormal returns for the two stocks?
b. Based on these abnormal returns, which company most likely won the lawsuit?
A company is analyzing two mutually exclusive projects, S and L, whose cash flows are shown below. Project S: -1,500 (Year 0), 1000 (Year 1), 560 (Year 2), 50 (Year 3). Project L: -1,200 (Year 0), 0 (Year 1), 600 (Year 2), 1,500 (Year 3). The company..
Calculate the effective annual interest rate.
A currency is currently worth $1.80 and has a volatility of 15%. The domestic and foreign risk-free interest rates are 5% and 2%, respectively. Use a two-step binomial tree to value a) a European four-month put option with a strike price of $1.79, an..
The returns on its equity are calculated as arithmetic returns
Giacinto Company, a small sport car manufacturing company, is considering a new automated production-line project.
If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is its WACC?
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What portion or percentage are the total “Interest Payments” of the initial loan value of $25,000?
If Ashley chooses to pays an additional $85 with each monthly mortgage payment, how fast will the mortgage be paid off?
Suppose 90-day investments in Britain has a 2% quarterly (90-day) return. In the U.S., 90-day investments of similar risk has a 1.5% quarterly (90-day) return. The spot exchange rate is, 1 British pound equals 1.50. If interest parity holds what is t..
What amount should Sunland Company pay for this investment to earn an 9% return?
Financial ratio analysis is often divided into five areas: liquidity, activity, debt, profitability, and market ratios. Differentiate each of these areas of analysis from the others and give and define examples of each. Which is of the greatest conce..
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