Question:
On January 1st, Joe's Company began to show serious interest in Toms Company. Joe's was trading at $52/ share with a beta of 1.02 and Tom's stock was trading at $28/ share with a Beta of .93. The S&P 500 had a return of 14.875 as of December 31st. On March 31st, Joe's was trading $50/ share and Tom's was trading for $31/ share, with talks between both companies increasing, the merger was to be completed on June 30th. On June 30th, Joe's closing price was $54.875/ share and Tom's closed at $32.125/ share. The mean return over this period not explained by the market for both companies as of March 31st was 4.625% and 4.875% for June 30th. For both companies, calculate the effect on stock values for each period (ie. March 31st and June 30th) and calculate the predicted return (normal return) for each period.