Explain calculations ? 3. (10 points) Price Reaction to New Information Suppose the CAPM holds and the

 Explain calculations ?

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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 Market Return 1% Beginning Market Cap of FB $200 billion May 1 -2% June 1 -1% $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? 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 Market Return 1% Beginning Market Cap of FB $200 billion May 1 -2% June 1 -1% $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?