conceptSM_ch14 - of Toronto Stock Exchange stocks to pick a...

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CONCEPT QUESTIONS - CHAPTER 14 14.1 List the three ways financing decisions can create value. 1. Fool investors 2. Reduce costs or increase subsidies 3. Create a new security 14.2 How do you define an efficient market? It is a market where current prices reflect all available information. Name the three foundations of market efficiency? Rationality, independent deviations from rationality and arbitrage 14.3 How would you describe the three forms of the efficient-market hypotheses? 1. Weak-form EMH postulates that prices reflect all information contained in the past history of prices. 2. Semistrong form EMH says that prices not only reflect the history of prices but all publicly available information. 3. Strong form EMH contends that prices reflect all available information, public and private (or "inside"). What could make markets inefficient? 1. Large costs of acquiring and skillfully utilizing information 2. The existence of private information 3. Large transactions costs Does market efficiency mean you can throw darts at a Financial Post listing
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Unformatted text preview: of Toronto Stock Exchange stocks to pick a portfolio? No. All it says is that, on average, a portfolio manager will not be able to achieve excess returns on a risk-adjusted basis. • What does it mean to say the price you pay for a stock is fair? It means that the stock has been priced taking into account all publicly available information. 14.4 • What conclusions about market efficiency can be drawn from available evidence? Evidence supports the weak form and semi strong form, but not the strong form, efficient market hypothesis. 14.5 • What are three implications of the efficient-market hypothesis for corporate finance? 1. The prices of stocks and bonds cannot be affected by the company's choice of accounting method. 2. Financial managers cannot time issues of stocks and bonds. 3. A firm can sell as many stocks and bonds as it wants without depressing prices....
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This note was uploaded on 03/17/2009 for the course ACTSC 371 taught by Professor Wood during the Fall '08 term at Waterloo.

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conceptSM_ch14 - of Toronto Stock Exchange stocks to pick a...

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