Reference no: EM133055976
Yesterday's closing share price of Metal Manufacturing was $45. Today, the company announced that its fourth quarter earnings will be 10% higher than last year's fourth quarter, and, as a result, the company's share price closed at $46. Metal Manufacturing has a beta of 0.85. The closing values of the market index on yesterday and today are 4,234 and 4,365 respectively. Currently, the three-month treasury bill rate is 5% p.a. (annual nominal rate).
Using the Capital Asset Pricing Model to determine abnormal returns, which of the following statement is correct?
a. Metal manufacturing realised a negative abnormal return of -4.2% today implying that the market responded negatively to the earnings increase announcement.
b. Metal manufacturing realised a positive abnormal return of 4.2% today implying that the market responded positively to the earnings increase announcement.
c. Metal Manufacturing realised zero abnormal return today implying that the market had already impounded the earnings information into its share price.
d. Metal manufacturing realised an abnormal return of -0.42% today implying that the investors expected the earnings increase to be larger than what was actually announced.
e. Metal manufacturing realised a positive abnormal return of 0.42% today implying that the investors expected the earnings increase to be smaller than what was actually announced.
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