Cf Homework Solution

Homework Solution2010Fall second half

Ch14
18. There are several ways to approach this problem, but all (when done correctly!) should give approximately the same answer. We have chosen to use the regression analysis function of an electronic spreadsheet program to calculate the alpha and beta for each security. The regressions are in the following form:

Security return = alpha + (beta ( market return) + error term

The results are:
| |Alpha |Beta |
|Executive Cheese |-1.44 |0.21 |
|Paddington Beer |1.33 |0.19 |

The abnormal return for Executive Cheese in February 2007 was:

–7.1 – [–1.44 + 0.21 ( (–0.5)] = –5.555%

For Paddington Beer, the abnormal return was:

–14.1 – [1.33 + 0.19 ( (–0.5)] = –15.335%

Thus, the average abnormal return of the two stocks during the month of the dividend announcement was –10.445%.

Ch15
11. a.
|Gross profits |$ |760,000 |
|Interest | |100,000 |
|EBT |$ |660,000 |
|Tax (at 35%) | |231,000 |
|Funds available to common shareholders |$ |429,000 |

b.
|Gross profits (EBT) |$ |760,000 |
|Tax (at 35%) | |266,000 |
|Net income |$ |494,000 |
|Preferred dividend | |80,000 |
|Funds available