Question

On January 21, 1993, The Wall Street Journal reported that General Electric Co.’ s fourth-quarter 1992 earnings rose 6.2% to $ 1.34 billion or $ 1.57 a share, setting a new record and bringing the earnings for 1992 to $ 4.73 billion or $ 5.51 a share. After adjusting for low- persistence items, 1992 earnings from continuing operations were up about 10% from the previous year.
The Journal also reported that forecasts made by analysts averaged $ 1.61 per share for the fourth quarter of 1992, and from $ 5.50 to $ 5.60 per share for the whole year. One analyst was quoted as saying that 1992 “wasn’t a bad year for GE” despite the downturn in the stock market on the day of the earnings announcement.
Yet, on the same day the fourth- quarter earnings were announced, General Electric Co.’ s stock price fell $ 1.50 to $ 82.625 on the New York Stock Exchange.

Required
a. Give three reasons to explain why this could happen.
b. Use the Sharpe- Lintner CAPM (Equations 4.2 and 4.3) to explain how the new information caused the current price to fall. Calculations are not required.



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  • CreatedSeptember 09, 2014
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