Solve only for Q3 I am attaching Q1 with solution for reference ?

Please solve Q 3 and explain calculations for Q3

		Apr-01	May-01	Jun-01	Remarks
Daily Risk Free Rate	Rf	0%	0%	0%	Given
Beta	b	0.8	0.8	0.8	Given
Daily Market Return	rm	-1%	2%	1%	Given
Expected stock return (as per CAPM)	re	-0.80%	1.60%	0.80%	re = rf + b*(rm - rf)
Expected Return due to company specific Event
Beginning Market cap	$ mn	100.00	120.00	125.00
Expected win from lawsuit (Incremental information)	$ mn	5.00	3.00	2.00	We only take the incremental information. On May 01. Incremental information is change in winning probability from 50% to 80%. Hence, we took only expected increase in winning of $ 3mn ($10*30%). Similarly, on Jun 01, increamental information is winning probability changed to 100% from 80%. Hence increase of only $ 2m ($10*20%)
Expected market cap after incorporating the new information	$ mn	105.00	123.00	127.00	Adding beginning market cap + increase in market cap due to new information
Expected increase in market cap due to company specific event		5.00%	2.50%	1.60%	( Ending value - Beginning Value)/ Beginning Value
Expected increase in stock price due to company specific event		5.00%	2.50%	1.60%	Change in market cap will be reflected throguh change in stock price as No of shares O/s remains the same
Net expected stock return (due to market movement + company specific)		4.20%	4.10%	2.40%

a. On Apr 01, since there was a new information of lawsuit with expected winning of $5 mn (i.e. 50% *$10 mn + 50%* $0 mn), there was stock return due to company specific news of 5%. However, due to market falling, expected return due to market movement is -0.8%. Hence net expected stock return on Apr 1 is 4.2% (5% -0.8%).

b. If the news was leaked on Mar15, market would have already discounted that information and there would have been impact on stock price due to announcement of this news. However, due to market movement, expected return on the stock on Apr 1 is -0.8%.

c. On May 01, since there was a incremental information of lawsuit with winning probability increasing from 50% to 80%. Hence, the expected incremental increse in expected winning is $ 3 mn (i.e. $ 8 mn - $ 5mn). Due to this incremental news, stock return due to company specific news of 2.5%. However, due to rise in market on May 01, expected return due to market movement is 1.6%. Hence net expected stock return on Jun 1 is 4.1% (2.5% + 1.6%)

d. On Jun 01, since there was a incremental information of lawsuit with winning probability increasing from 80% to 100% (company had won the lawsuit). Hence, the expected incremental increse in expected winning is $ 2 mn (i.e. $ 10 mn - $ 5mn - $ 3m). Due to this incremental news, stock return due to company specific news of 1.6%. However, due to rise in market on May 01, expected return due to market movement is 0.8%. Hence net expected stock return on Jun 1 is 2.4% (1.6% + 0.8%)

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? 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