Samson Co. announced its merger plans on October 25 and had a daily return of .5 percent. Thompson Co. announced its merger plans on October 26 and had a daily return of .8 percent. The Whitewood Co. announced its merger plans on October 27 and had a daily return of −.4 percent. The daily market returns for October 25 through October 27 were .2, −.3, and .4, respectively. What is the combined cumulative abnormal return for all companies who announced mergers from October 25 through October 27?
A).0%
B).2%
C).6%
D).8%
E)1.0%

Question

Quizplus · Accepted Answer

To calculate the cumulative abnormal return, we first need to calculate the expected return for each company based on the market return for each day. We use the following formula to calculate expected return:

Expected return = market return for the day

Then, we can calculate the abnormal return for each company using the following formula:

Abnormal return = actual return - expected return

Finally, we can calculate the cumulative abnormal return by adding up the abnormal returns for all companies.

For Samson Co.:

Expected return on Oct 25 = 0.2
Abnormal return on Oct 25 = 0.5% - 0.2% = 0.3%

For Thompson Co.:

Expected return on Oct 26 = -0.3
Abnormal return on Oct 26 = 0.8% - (-0.3%) = 1.1%

For Whitewood Co.:

Expected return on Oct 27 = 0.4
Abnormal return on Oct 27 = -0.4% - 0.4% = -0.8%

Cumulative abnormal return = 0.3% + 1.1% - 0.8% = 0.6%

Therefore, the combined cumulative abnormal return for all companies who announced mergers from October 25 through October 27 is 0.6%, which is option C.

Samson Co Announced Its Merger Plans on October 25 and Had