ICE Comm 303 Suggested Solutions to Chapter 10 Problems Fall

ICE Comm 303 Suggested Solutions to Chapter 10 Problems...

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Chapter 10: Market Efficiency and Behavioral Finance Answers to questions 10-1. Informational efficiency refers to how quickly the markets incorporate new information into security prices. This can impact corporate finance and investment decisions if all information is not incorporated into the firm’s stock price. For example, the stock may be undervalued because managers have good news about the company that they have not imparted to the markets. If the firm is underpriced, this could impact the firm’s ability to raise new equity, which in turn could impact the firm’s financing and investment decisions. In an efficient market, a manager will not be able to enhance shareholder value through changes in financial reporting that have no impact on cash flows. Investors will “see through” these changes and recognize that they are cosmetic only and have no impact on firm value. 10-5. If a stock follows a random walk with a trend, this does not mean investing in stocks is akin to gambling. First, investors can profit from the upward trend – that on average,
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This note was uploaded on 03/18/2008 for the course ICE 303 taught by Professor Roberts during the Spring '08 term at UVA.

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ICE Comm 303 Suggested Solutions to Chapter 10 Problems...

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