Question

You want to estimate the damages of a bad decision made by management of a company. You look at the stock returns, and you see that after the market digested the decision and information, the stock price declined by 28%. Over this time period, the market (S&P 500) also declined by 6%. Your beta estimate for the company is 1.22. The risk-free rate during this time period was 3.20%, and the market risk premium was 6.10%. For simplicity, let’s assume that you are looking at annual data (so, the returns over a full year). The value of the firm before this bad decision was $5.2 billion, and the firm had $1 billion in debt. Calculate the damages.

Answer 1

DAMAGES = 1.0754 BILLION