Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Chapter 14, Problem 18CQ
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Suppose we live in a world with a semi-strong
form efficient market. Explain if you could
expect to generate excess returns if you make
trades based on the following information
and why?
a. Record earnings information about a
stock provided by your broker.
b. Rumors about a potential merger of
a firm.
C. An announcement that came out
yesterday about a successful test of a
new product.
This problem, like the first one, is a brain teaser. If a market is efficient, how
is it possible for an investor to earn a profit?
You are an Acquisition Offer for an Investment Bank. You work in the High- Tech Investment Division of the Investment Bank. You understand high tech companies come and go very quickly. You also understand that the technology changes so quickly that a long-term forecast can be worthless very quickly. It is a changing market. You have been offered the opportunity to acquire a Silicon Valley based high tech company. You must decide if you recommend making the acquisition. You have been told that you must operate with a 6.0% WACC. You have decided that you will make your recommendation based upon a four-year forecast.
The Company:
The company, MERCO, makes processing chips for Intel. MERCO has signed two contracts with Intel. The first expires in two years and pays the company an annual amount of $1,924,261 and $2,212,900 for each year. The second contract was signed because Intel was happy with the work MERCO had done for it. The…
Chapter 14 Solutions
Corporate Finance
Ch. 14 - Prob. 1CQCh. 14 - Prob. 2CQCh. 14 - Efficient Market Hypothesis Which of the following...Ch. 14 - Market Efficiency Implications Explain why a...Ch. 14 - Efficient Market Hypothesis A stock market analyst...Ch. 14 - Semistrong Efficiency If a market is semistrong...Ch. 14 - Efficient Market Hypothesis What are the...Ch. 14 - Prob. 8CQCh. 14 - Prob. 9CQCh. 14 - Efficient Market Hypothesis For each of the...
Ch. 14 - Technical Analysis What would a technical analyst...Ch. 14 - Prob. 12CQCh. 14 - Prob. 13CQCh. 14 - Efficient Markets A hundred years ago or so,...Ch. 14 - Efficient Market Hypothesis Aerotech, an aerospace...Ch. 14 - Prob. 16CQCh. 14 - Prob. 17CQCh. 14 - Efficient Market Hypothesis Newtech Corp. is going...Ch. 14 - Prob. 19CQCh. 14 - Efficient Market Hypothesis The Durkin Investing...Ch. 14 - Efficient Market Hypothesis Your broker commented...Ch. 14 - Efficient Market Hypothesis A famous economist...Ch. 14 - Efficient Market Hypothesis Suppose the market is...Ch. 14 - Prob. 24CQCh. 14 - Prob. 25CQCh. 14 - Efficient Market Hypothesis Assume that markets...Ch. 14 - Prob. 27CQCh. 14 - Evidence on Market Efficiency Some people argue...Ch. 14 - Prob. 1QAPCh. 14 - Prob. 2QAPCh. 14 - Prob. 3QAPCh. 14 - Prob. 4QAPCh. 14 - Prob. 1MCCh. 14 - Prob. 2MCCh. 14 - Prob. 3MC
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- If a public test of a new product that has been publicly known to be under development at your company shows sensational results and is therefore expected to lead to a large positive NPV of future cash flows for your company (but likely to lead to an NPV which is less than what investors were expecting before the public announcement), explain whether your stock can be expected to go up or down on the news in a semi-strong efficient market where security prices reflect all information as it becomes public. Company is birkshire hathawayarrow_forwardIn a few sentences, answer the following question as completely as you can. Imagine you are the treasurer of a small manufacturing firm. Your firm is planning to go public (i.e., sell stock to investors for the first time). One unresolved question concerns the market’s required return on the stock. Given what you have learned, how do you think the required return will affect the market value of your firm’s stock? How would you go about estimating this rate?arrow_forwardYou read a story in the newspaper announcing the proposed merger of Dell Computer and Gateway. The merger is expected to greatly increase Gateway’s profitability. If you decide to invest in Gateway stock, you can expect to earn (a) above-average returns since you will share in the higher profits. (b) above-average returns since your stock price will definitely appreciate as higher profits are earned. (c) below average returns since computer makers have low-profit rates. (d) a normal return since stock prices adjusts to reflect expected changes in profitability almost immediately.arrow_forward
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- Analysts and investors often use return on equity (ROE) to compare profitability of a company with other firms in the industry. ROE is considered a very important measure, and managers strive to make the company’s ROE numbers look good. A) If a firm takes steps that increase its expected future ROE, its stock price will increase. B) Based on your understanding of the uses and limitations of ROE, which of the following projects will a manager likely choose if his or her bonus is solely based on the ROE of the next project? Project Y, with 40% ROE and a small investment, generating low expected cash flows Project X, with 35% ROE and a large investment, generating high expected cash flows C) Suppose you are trying to decide whether to invest in a company that generates a high expected ROE, and you want to conduct further analysis on the company’s performance. If you wanted to conduct a comparative analysis for the current year, you would: Compare the…arrow_forwardQ1. (a) You are a stock analyst in charge of valuing high-technology firms, and you are expected to come out with buy-sell recommendations for your clients. You are currently analyzing a firm called etalk.com that specializes in internet-based communication. You are expecting explosive growth in this area. However, the company is not currently profitable even though you believe it will be in the future. Your projections are that the firm will pay no dividends for the next 2 years. Three years from now, you expect the stock to pay its first dividend of $1.50 per share. You expect dividends to increase at a rate of 10 percent per year for two years after that. At that point, the industry will start to mature and growth will slow down; dividends will continue to grow at a rate of 5 percent per year for the foreseeable future.The stock is trading on the Sauder Stock Exchange for $15 per share. If you believe that the required rate of return is 12 percent, what is your estimate of the value…arrow_forwardDefine Weak, Semi-Strong and Strong forms of the Efficient Market Hypothesis (EMH). Please answer C and D!!!!! a. How would you construct a test of the Weak form of the EMH? b. What have researchers found when testing the Weak form of the EMH? c. Outline how you would conduct an event study. What efficient market hypothesis are you trying to test? d. Give an example where researchers have used an event study and what did they find? Was it consistent with the EMH?arrow_forward
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