I am attaching related sum for your reference with solution please solve for Q3 only?

Here, we need to find the return of the firm APP Ltd. on given dates.

There are two things, which affect the return of the firm APP.

1.) In the first part, they mentioned that the CAPM holds. So, the stock return will be adjusted according to the CAPM model.

2.) The firm has filed a lawsuit. So, the winning amount leads to an increase in the market cap of the firm and so as the return of the firm.

Let's have a look at all four questions:

a.) APP's return = Return as per CAPM + Return due to lawsuit

As per the CAPM model, return of the firm = Risk-free rate + Beta * (Market return - Risk-free rate)

Here Risk-free rate = 0%

So, the daily return of the firm based on the CAPM = Beta * Market return

Return on April 1, based on the CAPM = 0.8 * -1% = -0.8%

Now, let's calculate the return due to the lawsuit.

Return due to lawsuit = (Increase in probability of winning * Winning amount) / Market cap on a particular date

Return due to lawsuit = (50% * $10 million) / $100 million = 5% return

APP's return = -0.8% + 5% = 4.2%

b.) Here, it is not a surprise on 1st April. It was leaked on 15th March. So, market participant already has factored in this event. So, there is no increase in the probability of winning.

Return due to lawsuit = (0 * $10 million) / $100 million = 0% return

APP's return = -0.8% + 0% = -0.8%

c.) APP's return = Return as per CAPM + Return due to lawsuit

As per the CAPM model, return of the firm = Risk-free rate + Beta * (Market return - Risk-free rate)

Here Risk-free rate = 0%

So, the daily return of the firm based on the CAPM = Beta * Market return

Return on May 1, based on the CAPM = 0.8 * 2% = 1.6%

Now, let's calculate the return due to the lawsuit.

Return due to lawsuit = (Increase in probability of winning * Winning amount) / Market cap on a particular date

Increase in the probability = 80% - 50% = 30%

Return due to lawsuit = (30% * $10 million) / $120 million = 2.5% return

APP's return = 1.6% + 2.5% = 4.1%

d.) Daily return of the firm based on the CAPM = Beta * Market return

Return on May 1, based on the CAPM = 0.8 * 1% = 0.8%

Now, let's calculate the return due to the lawsuit.

Return due to lawsuit = (Increase in probability of winning * Winning amount) / Market cap on a particular date

Increase in the probability = 100% - 80% = 20%

Return due to lawsuit = (20% * $10 million) / $125 million = 1.6% return

APP's return = 0..8% + 1.6% = 2.4%

3. (10 points) Price Reaction to New Information Suppose the CAPM holds and the stock of the firm FB Ltd. has a beta of 1.27. For simplicity, assume that the daily risk-free rate is 0%. April 1 May 1 June 1 Market Return 1% -2% - 1% Beginning Market Cap of FB $200 billion $250 billion $300 billion a) On April 1, the FTC announces a surprising $5 billion lawsuit against FB. After the announcement, the market consensus is that FB has a 60% chance of losing. What is your best guess of FB's stock return on this date? Assume the lawsuit's result has no direct impact on FB's operations. b) Now suppose the news about the lawsuit was leaked out on March 15. But the amount was thought to be $10 billion. What is your best guess of FB's stock return on April 1? c) On May 1, new information about the lawsuit increases the census estimate of losing by FB to 80%. What is your best guess of FB's stock return on this date? d) On June 1, FB settles with the FTC. If FB's stock return on this date is -1%, what is your best guess of the settlement amount? 1. Price Reaction to New Information Suppose the CAPM holds and the stock of the firm APP Ltd. has a beta of 0.8. For simplicity, assume that the daily risk-free rate is 0%. June 1 April 1 -1% $100 Mil. Market Return Beginning Market Cap of APP May 1 2% $120 Mil. 1% $125 Mil. a) On April 1, APP announces a surprising $10 million lawsuit against its main rival, SAM Ltd. After the announcement, the market consensus is that APP has a 50% chance of winning. What is your best guess of APP's stock return on this date? Assume the lawsuit's result has no direct impact on their operations. b) Now suppose the news about the lawsuit was leaked out on March 15. What is your best guess of APP's stock return on April 1? c) On May 1, new information about the lawsuit increases the census estimate of winning by APP to 80%. What is your best guess of APP's stock return on this date? d) On June 1, the verdict date, APP wins the lawsuit and is awarded $10 million. What is your best guess of APP's stock return on this date