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Chapter 13 Corporate-Financing decisions and efficient capit

Chapter 13 Corporate-Financing decisions and efficient...

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Chapter 13 Corporate-Financing Decisions and Efficient Capital Markets (Corporate Finance) Efficient capital markets are those in which current market prices reflect all available information →current market prices reflect the underlying present value of securities →no way to make unusual or excess profits 13.1 Can financing decisions create value? capital budgeting decisions can create value by serving unsatisfied needs, creating entry barriers, produce products/services at lower cost, be the first one to develop a new product financial decisions can be analyzed the same way as capital budgeting decisions, present value criterion, but the results are different ,→ typical firm has fewer financing opportunities with positive NPV 3 ways to create valuable financing opportunities fool investors by issuing complex securities whose link is not easily understood empirical evidence suggests that this does not work reduce costs (or increase subsidies) → packaging securities to minimize taxes can increase firm value; minimize the costs of financing (investment bankers, lawyers) create a new security (that cannot be easily duplicated by combinations of existing ones) & new demand is served that may pay a premium o though, cannot be kept up as firms are not able to patent → supply↑→price ↓ 13.2 A description of Efficient Capital Markets efficient-market hypothesis → prices reflect underlying values and available info all information is reflected in prices immediately & investors should only expect to obtain a normal rate of return, as prices adjust before they can trade on the stock firms should expect to receive the fair value for securities that they sell (the present value) logical consequence of all this information being available, studies, sold, and uses in an effort to make profits from stock market trading is that the market becomes more efficient a market is efficient with respect to information if there is no way to make unusual or excess profits by using that information → in an inefficient market , there is either a delayed reaction , or an immediate overreaction with a subsequent correction Efficient-market response - the price instantaneously adjusts to and fully reflects new information; there is no tendency for subsequent increases or decreases Delayed response - The price adjusts slowly to the new information (Inefficient market) Overreaction - The price overadjusts to the new information → There s a bubble in the price sequence. (Inefficient market) 13.3 The different Types of Efficiency
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Chapter 13 Corporate-Financing Decisions and Efficient Capital Markets (Corporate Finance) Until now we assumed that the market responds immediately to all available information In reality, certain information may affect stock prices more quickly than other information separation of information into three classes to handle different response rates Information on passed prices
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