Question

1. On November 4, 2019 McDonald’s Corporation fired its CEO for having a consensual relationship in the workplace. The following data on their stock price, the level of the S&P 500, and the risk-free interest rate come from the days surrounding the announcement:

Day	McDonald’s Price	S&P 500	Risk free rate
November 1	197.78	3050.72	.000046
November 4	190.16	3078.96	.000046
November 5	189.65	3075.10	.000046

McDonald’s has a Beta of .26.

1. (20 points) What is the expected return for McDonald’s from the CAPM for November 4 and 5?
2. (20 points) What is the actual return of McDonald’s for November 4 and 5?
3. (20 points) What is the cumulative abnormal return for McDonald’s for these two days? If the market capitalization (Price * shares outstanding) for McDonald’s is $149.949B, how much did the firing of the CEO cost McDonald’s shareholders?

Answer 1

Expected return as per the CAPM Model is calculated as:

E(R)= Risk Free Return+ Beta (Expected Market Return- Risk Free Return)

Market and Stock Returns for the period is as follows:

	Day	McDonald’s Price (A)	S&P 500 (B)	Risk free rate	Return for Stock (A2-A1)/A1	Return for Market (B2-B1)/B1
1	Nov-01	197.78	3050.72	0.000046
2	Nov-04	190.16	3078.96	0.000046	-0.038528	0.009257
3	Nov-05	189.65	3075.1	0.000046	-0.002682	-0.001254

Thus the Expected Return of the Stock as per CAPM

On Nov 4 is:

E(R)= 0.000046+0.26(0.009257-0.000046)

=0.0024441

and Nov 5 is:

E(R)= 0.000046+0.26(-0.001254-0.000046)

=(0.000292)

Actual Return of the Stock for the 2 days is as follows:

Nov 4- (0.038528)

Nov 5- (0.002682)

Cumulative abnormal return for McDonald’s for these two days

Abnormal Return = Return Generated- CAPM Expected Return

Thus, Abnormal return for the 2 days:

Nov 4- (0.038528)- 0.0024441

=(0.040968)

Nov 5- (0.002682)- (0.000292)

= (0.002390)

Market Capitalization

Market Capitalization = No. of shares * Price per share

Thus, No. of shares (data as of Nov 1) = 149.949/197.78

= 0.758161 B shares

Total Market Cap as on Nov 5 is 0.758161*189.65

$143.7852 B

Thus loss of shareholder's wealth due to change of CEO is:

149.949-143.7852

= $6.1636 B