Question

22. The monthly rate of return on T-bills is 1%. The market went up this month by 1.5%. In addition, AmbChaser, Inc., which has an equity beta of 2, surprisingly just won a lawsuit that awards it $1 million immediately. (4 points) a. If the original value of AmbChaser equity were $100 million, what would you guess was the rate of return of its stock this month? b. What is your answer to (a) if the market had expected AmbChaser to win S2 million?

Answer 1

a. as the market grown by 1.5% in this month, the stock value also increases. As the Beta value is 2, means if the market increases by 1 point, the stock also increases by 2 points. In the given case the stock value is $100 million, with beta value of 2, and market increases by 1.5%, the stock value is going to be doubled, i.e. the company value is going to be $200.

b. as the expected win is $ 2 million, but they get only $1 million, it impacted the stock value in negative way.