Chapter 14 Solutions

Chapter 14 Solutions - Chapter 14 : Corporate Financing...

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Chapter 14 : Corporate Financing Decisions and Efficient Capital Markets 14.2 In an efficient market, the cumulative abnormal return (CAR) for Prospectors would rise substantially at the announcement of a new discovery. The CAR falls slightly on any day when no discovery is announced. There is a small positive probability that there will be a discovery on any given day. If there is no discovery on a particular day, the price should fall slightly because the good event did not occur. The substantial price increases on the rare days of discovery should balance the small declines on the other days, leaving CARs that are horizontal over time. 14.4 a. Ansari’s stock price should rise immediately after the announcement of the positive news. b. Only scenario (2) indicates market efficiency. In that case, the price of the stock rises immediately to the level that reflects the new information, eliminating all possibility of abnormal returns. In the other two scenarios, there are periods of time during which an investor could trade on the information and earn abnormal returns. 14.6 False. The stock price would have adjusted before the founder’s death only if investors had perfect forecasting ability. The 12.5 percent increase in the stock price after the founder’s death
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This note was uploaded on 06/10/2010 for the course ACTSC 372 taught by Professor Maryhardy during the Winter '09 term at Waterloo.

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Chapter 14 Solutions - Chapter 14 : Corporate Financing...

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