Reference no: EM132886780

Question - On March 15, 2019, D-Link Inc. announced that its earnings per share for the next quarter are expected to increase to 55 cents per share. D-Link also released its financial results for the year ended December 31, 2018, on the same date. The earnings per share in the prior quarter (ended December 31, 2018) were 20 cents per share, exactly what analysts had forecasted for that quarter. D-Link supported its forecast for the next quarter by pointing out the success of its new product launch and favourable product acceptance rates in new markets. At the end of trading on March 14, 2019, D-Link's shares had increased 30% for the year to date.

On March 15, 2019, D-Link's shares opened the day on the stock exchange at $20 and closed at $25. The stock exchange index increased 60 points on the day to close at 560. D-Link's beta is 0.8, the dividend paid by D-Link during the period is $1 per share and the Bank of Canada bonds rate on March 15, 2019, was 10%.

Required -

Calculate the following: (Use the market model for abnormal returns and the CAPM in your calculation)

a) The expected return on D-Link's shares for March 15, 2019. (Use CAPM)

b) The abnormal return of D-Link's shares for March 15, 2019. (Market model)

c) The ending price that supports an 11.6% expected return.

d) Suppose bad earnings news about the firm arrives at the beginning of the year and drives the ending price of the firm's shares down from $25 to $21. Find the expected return on D-Links share.

2. To the extent securities markets are not fully efficient, momentum trading could be an explanation for the significant increase in Techno's share price for the year to date. Identify 2 behavioral characteristics underlying momentum trading and explain how they could generate momentum in Techno shares.-