Question
Today, ABC Ltd. announced that it is undertaking a highly valuable capital project. The current price of the common stock of ABC is $50 per
Today, ABC Ltd. announced that it is undertaking a highly valuable capital project. The current price of the common stock of ABC is $50 per share and due to new project the stock price is expected to rise to $60 per share. However, the market participants are slow to learn and assume that it will take 8 days for the price of the stock to rise to $60. Assume that after 2 days from today the price of the stock rises to only $53 per share and at this price an equity mutual fund buys 2 million shares of the stock and hold these shares for next 6 days. The required expected rate of return on the stock is 6.2689% per annum.
Calculate the net present value of the equity funds purchase of 2 million shares of the stock. Also calculate the excess rate of return over 6 days of investment
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