Financial Theory and Corporate Policy 4e Key Chapter 11-15

In: Business and Management

Submitted By skyzz
Words 11793
Pages 48
Chapter 11
Efficient Capital Markets: Evidence
1. Roll’s critique (1977) is based on the assumption that capital markets are in equilibrium. What happens when the market is not in equilibrium? Suppose new information is revealed such that the market must adjust toward a new equilibrium which incorporates the news. Or suppose that a new security is introduced into the marketplace, as was the case of new issues studied in the Ibbotson (1975) paper. Given such a situation, the abnormal performance of an asset can be measured by the arbitrage profits available as its price is adjusted to a new market equilibrium. Before the disequilibrium situation as well as afterward, Roll’s critique applies and we cannot expect to observe any abnormal performance relative to an efficient index. However, the adjustment process itself can be used to detect abnormal performance relative to the market index prior to equilibrium. In this way, Ibbotson’s results can be interpreted either as 1) selection of an inefficient index, or 2) detection of abnormal performance during disequilibrium. 2. (a) The securities market can be efficient even though the market for information is not. All that is required for efficient securities markets is that prices fully reflect all available information. Should an individual—for example, a corporate insider—have monopoly access to valuable information, then the market cannot reflect the information because it is not publicly available. This is not a deficiency in the securities market, but rather a deficiency in the market for information. The quote taken from the special committee of the Securities and Exchange Commission is correct when it says that the efficient markets theory is silent as to the optimum amount of information required—that issue can be decided by better understanding of the supply of and demand for information. (b) Information is…...

Similar Documents

Corporate Financial Accounting and Reporting

...Corporate Financial Accounting and Reporting Tim Sutton second edition Corporate Financial Accounting and Reporting We work with leading authors to develop the strongest educational materials in business and finance, bringing cutting-edge thinking and best learning practice to a global market. Under a range of well-known imprints, including Financial Times Prentice Hall, we craft high quality print and electronic publications which help readers to understand and apply their content, whether studying or at work. To find out more about the complete range of our publishing please visit us on the World Wide Web at: www.pearsoned.co.uk Corporate Financial Accounting and Reporting Second Edition Tim Sutton Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoned.co.uk First published 2000 Second edition published 2004 © Financial Times Management 2000 © Pearson Education Limited 2004 The right of Timothy G. Sutton to be identified as author of this work has been asserted by him in accordance with the Copyright, Designs, and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a licence permitting restricted copying in the......

Words: 163377 - Pages: 654

Financial Manegement: Answers to End-of-Chapter Questions: Chapter 1 an Overview of Corporate Finance and the Financial Environment

...Chapter 1 An Overview of Financial Management ANSWERS TO END-OF-CHAPTER QUESTIONS 1-1 a. A proprietorship, or sole proprietorship, is a business owned by one individual. A partnership exists when two or more persons associate to conduct a business. I contrast, a corporation is a legal entity n created by a state. The corporation is separate and distinct from its owners and managers. b. In a limited partnership, limited partners’ liabilities, investment returns and control are limited, while general partners have unlimited liability and control. A limited liability partnership (LLP), sometimes called a limited liability company (LLC), combines the limited liability advantage of a corporation with the tax advantages of a partnership. A professional corporation (PC), known in some states as a professional association (PA), has most of the benefits of incorporation but the participants are not relieved of professional (malpractice) liability. c. Stockholder wealth maximization is the appropriate goal for management decisions. The risk and timing associated with expected earnings per share and cash flows are considered in order to maximize the price of the firm’s common stock. d. Social responsibility is the concept that businesses should be partly responsible for, and thus bear the costs of, the welfare of society at large. Business ethics can be thought of as a company’s attitude and conduct toward its employees, customers, community, and stockholders. A firm’s commitment...

Words: 2050 - Pages: 9

Financial Management Theory and Practice

...An Overview of Corporate Finance and the Financial Environment In a beauty contest for companies, the winner is . . . General Electric. 11 Or at least General Electric is the most admired company in America, according to Fortune magazine’s annual survey. The other top ten finalists are Cisco Systems, WalMart Stores, Southwest Airlines, Microsoft, Home Depot, Berkshire Hathaway, Charles Schwab, Intel, and Dell Computer. What do these companies have that separates them from the rest of the pack? According to more than 4,000 executives, directors, and security analysts, these companies have the highest average scores across eight attributes: (1) innovativeness, (2) quality of management, (3) employee talent, (4) quality of products and services, (5) long-term investment value, (6) financial soundness, (7) social responsibility, and (8) use of corporate assets. These companies also have an incredible focus on using technology to reduce costs, to reduce inventory, and to speed up product delivery. For example, workers at Dell previously touched a computer 130 times during the assembly process but now touch it only 60 times. Using point-of-sale data, Wal-Mart is able to identify and meet surSee http://www.fortune. com for updates on the U.S. prising customer needs, such as bagels in Mexico, smoke detectors in Brazil, and house ranking. Fortune also ranks paint during the winter in Puerto Rico. Many of these companies are changing the way the Global Most Admired. business works...

Words: 351447 - Pages: 1406

Financial Accounting Theory

...Scott, Financial Accounting Theory, 6th Edition Instructor’s Manual Chapter 2 Suggested Solutions to Questions and Problems 1. P.V. Ltd. Income Statement for Year 2 Accretion of discount (10% × 286.36) $28.64 P.V. Ltd. Balance Sheet As at Time 2 Financial Asset Cash $315.00 Shareholders’ Equity Opening balance Net income Capital Asset Present value 0.00 $315.00 $315.00 $286.36 28.64 Note that cash includes interest at 10% on opening cash balance of $150. 2. Suppose that P.V. Ltd. paid a dividend of $10 at the end of year 1 (any portion of year 1 net income would do). Then, its year 2 opening net assets are $276.36, and net income would be: P.V. Ltd. Income Statement For Year 2 Accretion of discount (10% × 276.36) $27.64 Copyright © 2012 Pearson Canada Inc 11 Scott, Financial Accounting Theory, 6th Edition Instructor’s Manual P.V.’s balance sheet at time 2 would be: P.V. Ltd. Balance Sheet As at Time 2 Financial Asset Cash: (140 + 14 + 150) $304.00 Chapter 2 Shareholders’ Equity Opening balance: $276.36 (286.36 - 10.00 dividend) Capital Asset, at Present value 0.00 $304.00 $304.00 Net income 27.64 Thus, at time 2 the shareholders have: Cash from dividend Interest at 10% on cash dividend, for year 2 Value of firm per balance sheet $10.00 1.00 304.00 $315.00 This is the same value as that of the firm at time 2, assuming P.V. Ltd. paid no dividends (see Question 1). Consequently, the firm’s dividend policy does not matter to the......

Words: 112738 - Pages: 451

Foundations of Financial Markets and Institutions, 4e (Fabozzi/Modigliani/Jones)

...Foundations of Financial Markets and Institutions, 4e (Fabozzi/Modigliani/Jones) Chapter 9 Properties and Pricing of Financial Assets Multiple Choice Questions 1 Properties of Financial Assets 1) Which of the below is NOT one of the eleven properties of financial assets? A) moneyness B) multiplicity and denomination C) reversibility D) cash flow Answer: B Comment: The eleven properties of financial assets are (1) moneyness, (2) divisibility and denomination, (3) reversibility, (4) cash flow, (5) term to maturity, (6) convertibility, (7) currency, (8) liquidity, (9) return predictability, (10) complexity, and (11) tax status. Diff: 2 Topic: 9.1 Properties of Financial Assets Objective: 9.1 the many key properties of financial assets: moneyness; divisibility and denomination; reversibility; cash flow and return; term to maturity; convertibility; currency; liquidity; return predictability or risk; complexity; and tax status 2) Which of the below is NOT one of the eleven properties of financial assets? A) convertibility B) currency C) liquidity predictability D) tax status Answer: C Comment: The eleven properties of financial assets are (1) moneyness, (2) divisibility and denomination, (3) reversibility, (4) cash flow, (5) term to maturity, (6) convertibility, (7) currency, (8) liquidity, (9) return predictability, (10) complexity, and (11) tax status. Diff: 2 Topic: 9.1 Properties of Financial Assets Objective: 9.1 the many key properties of financial assets: moneyness;......

Words: 33476 - Pages: 134

The Theory and Practice of Corporate Finance:

...Journal of Financial Economics 61 (2001) 000-000 The theory and practice of corporate finance: Evidence from the field John R. Grahama, Campbell R. Harveya,b,* aFuqua School of Business, Duke University, Durham, NC 27708, USA bNational Bureau of Economic Research, Cambridge, MA 02912, USA (Received 2 August 1999; final version received 10 December 1999) Abstract We survey 392 CFOs about the cost of capital, capital budgeting, and capital structure. Large firms rely heavily on present value techniques and the capital asset pricing model, while small firms are relatively likely to use the payback criterion. A surprising number of firms use firm risk rather than project risk in evaluating new investments. Firms are concerned about financial flexibility and credit ratings when issuing debt, and earnings per share dilution and recent stock price appreciation when issuing equity. We find some support for the pecking-order and trade-off capital structure hypotheses but little evidence that executives are concerned about asset substitution, asymmetric information, transactions costs, free cash flows, or personal taxes. JEL classification: G31, G32, G12 Key words: Capital structure; Cost of capital; Cost of equity; Capital budgeting; Discount rates; Project valuation; Survey *Corresponding author, Tel: 919 660 7768, Fax: 919 660 7971 E-mail address: ......

Words: 18591 - Pages: 75

Financial Management: Theory & Practice

... Study Guide Financial Management: Theory & Practice Fourteenth Edition Eugene F. Brigham University of Florida Michael C. Ehrhardt University of Tennessee ________________________________________________________________________________ Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. This is an electronic version of the print textbook. Due to electronic rights restrictions, some third party content may be suppressed. Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it. For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest. Copyright 2013 Cengage Learning. All Rights Reserved. May not be......

Words: 197028 - Pages: 789

Audit Chapter 15 Solutions

...CHAPTER 15 Debt and Equity Capital Review Questions 15–1 A trust indenture is drawn to protect the position of bondholders by imposing restrictions upon the borrowing corporation. One of the most common of these restrictions is that the company must not declare dividends that would cause the working capital to fall below a specified amount. An overly generous dividend policy could leave the company so short of cash as to endanger the position of bondholders. 15–2 Restrictions commonly imposed on a borrowing company by long-term creditors relate to (a) dividend payments, (b) acquisition of property and equipment, (c) increases in managerial compensation and (d) acquisition of additional debt. Such actions are usually permitted only if they will not reduce the current ratio and amount of working capital below specified levels, or increase the debt to equity ratio above a specified level. Creation of a sinking fund is another common requirement designed to assure that cash will be available to pay the long-term debt at maturity. 15–3 The trustee protects the interests of the bondholders by accounting for the issuance and redemption of bond certificates, determining that provisions of the borrowing agreement are observed by the corporation, and reporting periodically on the amount of the liability and of any related sinking fund. This work by the trustee leaves little opportunity for either error or fraud in the issuance, servicing, or redemption of......

Words: 4365 - Pages: 18

A Review of Corporate Financial Policy in Emerging Markets: the Role of Financial Policy

...Corporate Financial Policies In Emerging Markets: The Role Of Financial Market Development Paper by; Charles Amo-Yartey Joshua Abor Article Reviewed & Presented by Gabriel Nomotsu Teye- Ali George. E. A Anang Prince Baah Takyi Outline of Presentation Definition of Key Terms Introduction Research Problems Methodology Key Findings Study Gaps For Future Research Research Questions Literature Review Conclusion and Remarks Definition of Key Terms  Financial markets: This is a market where financial instruments are traded.  Emerging markets: An emerging market economy (EME) is defined as an economy with low to middle per capita income  Financial policy: Criteria describing a corporation's choices regarding its debt/equity mix, currencies of denomination, maturity structure, method of financing investment projects, and hedging decisions with a goal of maximizing the value of the firm to some set of stockholders. Definition of Key Terms  Capitalization: The total dollar market value of all of a company's outstanding shares.  Capital structure: Refers to the way a corporation finances its assets through equity and long-term debt.  Financial structure: The structure of a company's sources of financing, including shareholders' equity, long- and short-term debt, and accounts payable. Research Problem  The financial markets in emerging markets have undergone considerable growth in recent times, mainly as a result of the trade......

Words: 1333 - Pages: 6

Auditing Chapter 15

...Chapter 1 The Demand for Audit and Other Assurance Services * Review Questions 1-1 The relationship among audit services, attestation services, and assurance services is reflected in Figure 1-3 on page 12 of the text. An assurance service is an independent professional service to improve the quality of information for decision makers. An attestation service is a form of assurance service in which the CPA firm issues a report about the reliability of an assertion that is the responsibility of another party. Audit services are a form of attestation service in which the auditor expresses a written conclusion about the degree of correspondence between information and established criteria. The most common form of audit service is an audit of historical financial statements, in which the auditor expresses a conclusion as to whether the financial statements are presented in accordance with an applicable financial reporting framework such as U.S. GAAP or IFRS. An example of an attestation service is a report on the effectiveness of an entity’s internal control over financial reporting. There are many possible forms of assurance services, including services related to business performance measurement, health care performance, and information system reliability. 1-2 An independent audit is a means of satisfying the need for reliable information on the part of decision makers. Factors of a complex society that contribute to this need are: 1. Remoteness of......

Words: 3815 - Pages: 16

Financial Theory Copeland Weston Solutions Pdf

...Ebook Financial Theory Copeland Weston Solutions from our online library FINANCIAL THEORY COPELAND WESTON SOLUTIONS PDF Download: FINANCIAL THEORY COPELAND WESTON SOLUTIONS PDF FINANCIAL THEORY COPELAND WESTON SOLUTIONS PDF - Are you looking for PDF/Ebooks Financial Theory Copeland Weston Solutions?. You will be glad to know that right now Financial Theory Copeland Weston Solutions is available on our online library. With our online resources, you can find Financial Theory Copeland Weston Solutions or just about any type of manual, for any type of product. Best of all, they are entirely free to find, use and download, so there is no cost or stress at all. Financial Theory Copeland Weston Solutions may not make exciting reading, but Financial Theory Copeland Weston Solutions is packed with valuable instructions, information and warnings. We also have many ebooks and user guide is also related with Financial Theory Copeland Weston Solutions, include : Copeland Weston Shastri Financial Theory, financial theory and corporate policy copeland pdf, Financial Theory And Corporate Policy Copeland, Financial Theory And Corporate Policy Copeland Pearson, Thomas Copeland Financial Theory And Corporate Policy, Copeland Weston Shastri, Weston And Copeland Managerial Finance, Copeland Weston Shastri Chapter 5, Financial Accounting Theory Deegan Solutions, financial accounting theory 5th edition solutions, Financial Accounting Theory Deegan 4e Solutions, scott financial......

Words: 1954 - Pages: 8

Fundamental 15 Chapter 5

...Chapter 6: 6-1, 6-2, 6-5, 6-7, 6-15 6-1 Determinants of Interest Rates for Individual Securities A particular security’s default risk premium is 2 percent. For all securities, the inflation risk premium is 1.75 percent and the real interest rate is 3.5 percent. The security’s liquidity risk premium is 0.25 percent and maturity risk premium is 0.85 percent. The security has no special covenants. Calculate the security’s equilibrium rate of return. (LG6-4) [1.035*1.0175] - 1 = 0.05311, or 5.311%  6-2 Determinants of Interest Rates for Individual Securities You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 1.25 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds: Real interest rate 0.75% Default risk premium 1.15% Liquidity risk premium 0.50% Maturity risk premium 1.75% a. What is the inflation premium? (LG6-4) IP = 1.25% - 0.75 = 0.50% b. What is the fair interest rate on Moore Corporation 30-year bonds? (LG6-4) I = (0.50 + .75% +1.15% +0.50% + 0 + 1.75%) I = 4.65% 6-5 Unbiased Expectations Theory Suppose that the current 1-year rate (1-year spot rate) and expected 1-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows: 1R1 = 6%, E(2r1) = 7%, E(3r1) = 7.5%, E(4r1) = 7.85% Using the......

Words: 1134 - Pages: 5

Essays in Accounting Theory: Corporate Earnings Management in a Dynamic Setting and Public Disclosure in the Financial Services Industry

...Essays in Accounting Theory: Corporate Earnings Management in a Dynamic Setting and Public Disclosure in the Financial Services Industry A Dissertation Presented to the Faculty of the Graduate School of Yale University in Candidacy for the Degree of Doctor of Philosophy by Kai Du Dissertation Director: Shyam Sunder December 2012 c 2012 by Kai Du All rights reserved. Abstract Essays in Accounting Theory: Corporate Earnings Management in a Dynamic Setting and Public Disclosure in the Financial Services Industry Kai Du 2012 This dissertation consists of three essays on the interactions between economic fundamentals and accounting information in three different settings: an infinite-horizon financial reporting problem, a coordination game with trading in the secondary market, and a bank which provides risk sharing among demand depositors. In the first essay, I propose a dynamic model of corporate earnings management in which investors have different expectations schemes. I find that while earnings management may exist when investors have rational expectations or misspecified Bayesian beliefs, it disappears in the long run of an adaptive learning process. The model also offers ample predictions on the time-series properties of asset prices and return predictabilities. The second essay studies the role of public disclosure by a distressed firm whose creditors engage in a coordination game with trading. I find that conditioned on the private......

Words: 38087 - Pages: 153

Financial Management Theory and Practice

... Financial Management This page intentionally left blank 12e Financial Management Theory and Practice Eugene F. Brigham University of Florida Michael C. Ehrhardt University of Tennessee Financial Management: Theory and Practice Twelfth Edition Eugene F. Brigham and Michael C. Ehrhardt VP/Editorial Director: Jack W. Calhoun Editorial Assistant: Adele Scholtz Technology Project Manager: Matt McKinney Editor-in-Chief: Alex von Rosenberg Sr. Content Project Manager: Cliff Kallemeyn Art Director: Bethany Casey Executive Editor: Mike Reynolds Marketing Manager: Jason Krall Sr. First Print Buyer: Sandee Milewski Sr. Developmental Editor: Elizabeth Thomson Sr. Marketing Communications Manager: Jim Overly Printer: RR Donnelley & Sons, Willard OH COPYRIGHT © 2008, 2005 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. ALL RIGHTS RESERVED. No part of this work covered by the copyright hereon may be reproduced or used in any form or by any means—graphic, electronic, or mechanical, including photocopying, recording, taping, Web distribution or information storage and retrieval systems, or in any other manner—without the written permission of the publisher. Library of Congress Control Number: 2007921348 Printed in the United States of America 1 2 3 4 5 09 08 07 06 ISBN-13:......

Words: 557614 - Pages: 2231

Mkt 475 Wk 11 Quiz 10 Chapter 15

...WK 11 QUIZ 10 CHAPTER 15 To purchase this visit here: http://www.activitymode.com/product/mkt-475-wk-11-quiz-10-chapter-15/ Contact us at: SUPPORT@ACTIVITYMODE.COM MKT 475 WK 11 QUIZ 10 CHAPTER 15 MKT 475 WK 11 Quiz 10 Chapter 15 All Questions Included... Activity Mode aims to provide quality study notes and tutorials to the students of MKT 475 WK 11 Quiz 10 Chapter 15 in order to ace their studies. MKT 475 WK 11 QUIZ 10 CHAPTER 15 To purchase this visit here: http://www.activitymode.com/product/mkt-475-wk-11-quiz-10-chapter-15/ Contact us at: SUPPORT@ACTIVITYMODE.COM MKT 475 WK 11 QUIZ 10 CHAPTER 15 MKT 475 WK 11 Quiz 10 Chapter 15 All Questions Included... Activity Mode aims to provide quality study notes and tutorials to the students of MKT 475 WK 11 Quiz 10 Chapter 15 in order to ace their studies. MKT 475 WK 11 QUIZ 10 CHAPTER 15 To purchase this visit here: http://www.activitymode.com/product/mkt-475-wk-11-quiz-10-chapter-15/ Contact us at: SUPPORT@ACTIVITYMODE.COM MKT 475 WK 11 QUIZ 10 CHAPTER 15 MKT 475 WK 11 Quiz 10 Chapter 15 All Questions Included... Activity Mode aims to provide quality study notes and tutorials to the students of MKT 475 WK 11 Quiz 10 Chapter 15 in order to ace their studies. MKT 475 WK 11 QUIZ 10 CHAPTER 15 To purchase this visit here: http://www.activitymode.com/product/mkt-475-wk-11-quiz-10-chapter-15/ Contact us at: SUPPORT@ACTIVITYMODE.COM MKT 475 WK 11 QUIZ 10 CHAPTER 15 MKT 475 WK 11......

Words: 633 - Pages: 3