Chap013(WW-FIN357ALT) - 13-16-113-1Chapter Outline13.1 Can...

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Unformatted text preview: 13-16-113-1Chapter Outline13.1 Can Financing Decisions Create Value?13.2 A Description of Efficient Capital Markets13.3 The Different Types of Efficiency13.4 The Evidence13.5 The Behavioral Challenge to Market Efficiency13.6 Empirical Challenges to Market Efficiency13.7 Reviewing the Differences13.8 Implications for Corporate Finance13.9 Summary and Conclusions13-26-213-213.1 Can Financing Decisions Create Value?Earlier chapters discussed how to evaluate projects according to the NPV criterion.We now address financingasopposed toinvestingdecisions.NPV criteria are also used to evaluate financing decisions.13-36-313-3What Sort of Financing Decisions?Typical financing decisions include:How much debt and equity to sellWhen (or if) to pay dividendsWhen to sell debt and equityWhat types of debt and equity to issue13-46-413-4How to Create Value through Financing1.Fool investors2.Reduce costs or increase subsidies3.Create a new securityMinimizing the cost of capital is consistent with maximizing firm value 13-56-513-513.2 A Description of Efficient Capital MarketsAn efficientmarket is one in which stock prices are in equilibrium, and fully reflect all available information.The Efficient Market Hypothesis (EMH) has implications for investors and firms.13-66-613-613.2 A Description of Efficient Capital MarketsImplications of the EMH.Since information is quickly reflected in security prices, knowing information after it is releaseddoes an investor no good.Firms should expect to receive the fair value for the securities they sell. Investors should expect to receive the fair value for securities they buy and sell13-76-713-7What is Market equilibrium?In equilibrium, stock prices are stable. No general tendency to buy or sell.Expected price equals actual price. Stocks plot on the SMLRs= D1/P+ g = RF+ (RM- RF)B.13-86-813-8D1PHow is equilibrium established?If Rs= + g > Rs, then Pis too low.If the price is lower than the fundamental value, then the stock is a bargain.Buy orders will exceed sell orders, the price will be bid up, and D1/Pfalls untilD1/P+ g = Rs= Rs.^^^13-96-913-9Why Do Stock Prices change?1grDPi-=Ri= RF+ (RM- RF)bi may change due to:Inflation expectationsRisk aversionCompany risk Expected g may change....
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Chap013(WW-FIN357ALT) - 13-16-113-1Chapter Outline13.1 Can...

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