Question

Problem 7-1 Cumulative Abnormal Returns (LO2, CFA2)

On November 14, Thorogood Enterprises announced that the public and acrimonious battle with its current CEO had been resolved. Under the terms of the deal, the CEO would step down from his position immediately. In exchange, he was given a generous severance package. Given the information below, calculate the cumulative abnormal return (CAR) around this announcement. Assume the company has an expected return equal to the market return. (A negative value should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Round your answers to 1 decimal place.)

Date	Market Return (%)	Company Return (%)
Nov 7	.9	.5
Nov 8	.7	.5
Nov 9	−.6	−.2
Nov 10	−.6	−.4
Nov 11	1.7	1.0
Nov 14	−.5	2.2
Nov 15	.1	.1
Nov 16	.9	1.1
Nov 17	.6	.7
Nov 18	−.6	.0
Nov 19	.7	.2

Days From Announcement	Daily Abnormal Return	Cumulative Abnormal Return
-5
-4
-3
-2
-1
0
1
2
3
4
5

Answer 1

Abnormal Return, this can be calculated as taking off market return from stock return.

Date	Market Return (%) (a)	Company Return (%) (b)	Abnormal Return (%) (b-a)	Cumulative Abnormal Return
Nov-07	0.9	0.5	-0.4
Nov-08	0.7	0.5	-0.2	-0.6
Nov-09	-0.6	-0.2	0.4	0.2
Nov-10	-0.6	-0.4	0.2	0.6
Nov-11	1.7	1	-0.7	-0.5
Nov-14	-0.5	2.2	2.7	2
Nov-15	0.1	0.1	0	2.7
Nov-16	0.9	1.1	0.2	0.2
Nov-17	0.6	0.7	0.1	0.3
Nov-18	-0.6	0	0.6	0.7
Nov-19	0.7	0.2	-0.5	0.1