Investors expect the market rate of return in the coming year to be 12%. The T-b

Question

Investors expect the market rate of return in the coming year to be 12%. The T-bill rate is 4%. Changing Fortunes Industries' stock has a beta of 0.5. The market value of its outstanding equity is $100 million. If the market return in the coming year actually turns out to be 10%, what is your best guess as to the rate of return that will be earned on Changing Fortunes' stock? Continue from Question 8. Suppose now that Changing Fortunes wins a surprising lawsuit during the year. Changing Fortunes' stock return during the year turns out to be 10%. What is your best guess as to the settlement amount won by Changing Fortunes?

Explanation / Answer

Hi, Please find the answer as follows: a) Expected Return on the stock = 4 + .5*(12-4) = 8% If it is 10% b) Expected Return on the stock = 4 + .5*(10-4) = 7% c) Amount earned as an additional return = 100000000*.03 = 3000000 Net value of the settlement = 5000000 Market expected a settlement of 5000000 - 3000000 = 2000000 Thanks.

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