Chapter 14 - Chapter 14: Corporate Financing Decisions...

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Actsc 372 - F11 Chap. 14 Chapter 14: Corporate Financing Decisions & Capital Efficient Markets Ken Seng Tan Actsc 372 Fall 2011 Actsc 372 - F11 Chap. 14 2 Chapter Outline ± Can Financing Decisions Create Value? ± A Description of Efficient Capital Markets ± The Different Types of Efficiency ± The Empirical Evidence ± Challenges to Market Efficiency ± Implications for Corporate Finance ± Summary and Conclusions Actsc 372 - F11 Chap. 14 3 Can Financing Decisions Create Value? ± We learned how to evaluate investment projects according to NPV criterion. ± Next few chapters concern financing decisions. ± Typical financing decisions include: ± How much debt and equity to sell ± What types of debt and equity to sell ± When to sell debt and equity ± When (or if) to pay dividends ± Just as we can use NPV criteria to evaluate investment decisions, we can use NPV to evaluate financing decisions.
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Actsc 372 - F11 Chap. 14 4 How to Create Value through Financing? ± Fool investors ± Financial managers try to package securities to receive the greatest value ± Empirical evidence suggests that it is hard to fool investors consistently ± Reduce Costs or Increase Subsidies ± Certain forms of financing have tax advantages or carry other subsidies. ± Any financing technique involve other costs (e.g. investment bankers, lawyers, accountants). ± Reducing these costs can also increase firm value ± Create a New Security !!! ± Sometimes a firm can find a previously-unsatisfied clientele and issue new securities at favorable prices. ± In the long-run, this value creation is relatively small, however Actsc 372 - F11 Chap. 14 5 Efficient Capital Markets ± An efficient capital market is defined as one in which the prices of all securities immediately and accurately reflect all relevant information about the securities. ± This definition implies that security prices, as determined in the capital markets, are “correct” ± The Efficient Market Hypothesis ( EMH ) states that markets are efficient, and therefore, in its strictest sense, implies that prices accurately reflect all available information at any point in time. ± The EMH has implications for investors and firms. ± Since information is reflected in security prices quickly, knowing information when it is released does an investor no good. ± Firms should expect to receive the fair value for securities that they sell. Firms cannot profit from fooling investors in an efficient market. Actsc 372 - F11 Chap. 14 Figure 14.1 Reaction of Stock Price to New Information in Efficient and Inefficient Markets
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Actsc 372 - F11 Chap. 14 Share Prices of Toyota Motors (TM) 7 Actsc 372 - F11 Chap. 14 8 American International Group, Inc. (AIG) http://www.marketwatch.com/news/story/lehman-failure-aig-struggle-drive/story.aspx?guid={8E886D48-E3C7-4CE2-95F4-7099CE1A49DB} Actsc 372 - F11 Chap. 14 MFC www.theglobeandmail.com/globe-investor/markets-drive-manulife-to-hefty-loss/article1662633/
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Actsc 372 - F11 Chap. 14 10 Foundations of Market Efficiency ± Any one of the following conditions leads to market efficiency ± Investor Rationality ±
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Chapter 14 - Chapter 14: Corporate Financing Decisions...

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