financial accounting & Ball and Brown 1968 study
The following table provides information about three NZSX listed companies, A Ltd, B Ltd and C Ltd, with some missing entries for B Ltd and C Ltd.
The following table provides information about three NZSX listed companies, A Ltd, B Ltd and C Ltd, with some missing entries for B Ltd and C Ltd. A Ltd B Ltd C Ltd Forecast error in EPS for the current year $0.012 -$0.022 -$0.034 Actual return in share price for the current year 0.095 ? 0.066 Abnormal return in share price for the current year 0.006 -0.025 Market model equation E(R) = 0.037 +1.021 x Rm? ? ? The following two market model equations are used to estimate the expected return in share price for C Ltd for the current year: Equation 1: Equation 2: E(R) = 0.036 + 1.150 x Rm E(R) = 0.027 + 1.230 x Rm Where: E(R) is the expected return in share price for the company for the current year; and Rm is the market return in share price for the current year. Required: (a) Calculate the expected return in share price for A Ltd for the current year. Show your workings and round your answers to 3 decimal places. (b) Calculate the abnormal return in share price for C Ltd using the market model equations, i.e., Equation 1 and Equation 2, respectively. Show your workings and round your answers to 3 decimal places. (c) Assume earnings is the only source of new information in the market. Referring to research evidence of the information theory and based on your calculations above, briefly explain which market model equation (i.e., Equation 1 and Equation 2) you should choose for C Ltd. (Maximum words: 250) The following table provides information about three NZSX listed companies, A Ltd, B Ltd and C Ltd, with some missing entries for B Ltd and C Ltd. A Ltd B Ltd C Ltd Forecast error in EPS for the current year $0.012 -$0.022 -$0.034 Actual return in share price for the current year 0.095 ? 0.066 Abnormal return in share price for the current year 0.006 -0.025 Market model equation E(R) = 0.037 +1.021 x Rm? ? ? The following two market model equations are used to estimate the expected return in share price for C Ltd for the current year: Equation 1: Equation 2: E(R) = 0.036 + 1.150 x Rm E(R) = 0.027 + 1.230 x Rm Where: E(R) is the expected return in share price for the company for the current year; and Rm is the market return in share price for the current year. Required: (a) Calculate the expected return in share price for A Ltd for the current year. Show your workings and round your answers to 3 decimal places. (b) Calculate the abnormal return in share price for C Ltd using the market model equations, i.e., Equation 1 and Equation 2, respectively. Show your workings and round your answers to 3 decimal places. (c) Assume earnings is the only source of new information in the market. Referring to research evidence of the information theory and based on your calculations above, briefly explain which market model equation (i.e., Equation 1 and Equation 2) you should choose for C Ltd. (Maximum words: 250)
