On 6 January 2006 Fine Textiles (FTX)Ltd announces its interim dividend payment.The interim dividend paid will be $0.18.The market had a dividend of $0.22.On 5 January 2006 FTX shares closed at $5.46.On 6 January FTX shares closed at $5.65 (trading cum- dividend).FTX has a beta of 1.2.If the yield on 10- year Treasury bonds on the 6 January was 6.75% p.a.and the S&P/ASX 200 index generated a return of 0.48%,what was the abnormal return generated by FTX shares on the day of the announcement?

Question

Quizplus · Accepted Answer

The abnormal return is calculated by comparing the actual return of the stock to the expected return based on the market model. The expected return can be calculated using the formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Given:- Risk-Free Rate = 6.75% p.a. (or 0.018493% for a day, assuming 365 days in a year)- Beta = 1.2- Market Return = 0.48%Expected Return = 0.018493% + 1.2 * (0.48% - 0.018493%) = 0.5730084%Actual Return = ((Closing Price - Opening Price + Dividend) / Opening Price) * 100= ((5.65 - 5.46 + 0.18) / 5.46) * 100 = 6.5934066%Abnormal Return = Actual Return - Expected Return = 6.5934066% - 0.5730084% = 6.02%However, the calculation above matches closest to option B (6.02 per cent), which suggests there might have been a misunderstanding in the question's expectation or a miscalculation. Given the provided answer options and the calculation, the correct process leads to a result that matches option B, not C, based on standard financial formulas and the given data. This discrepancy indicates a need for clarification or reevaluation of the provided answer choices and the calculation method.

On 6 January 2006 Fine Textiles (FTX)Ltd Announces Its Interim