Old Exam Solutions - Chapter 7

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Money and Banking
Old Exam Solutions - Chapter 7
Fill in the Blanks (NO EXPLANATIONS)
Note, some of these are trivial, but most require thought.
1. Holding everything else constant, an increase in the perceived riskiness of a stock would lead to
(an increase in / a decrease in / an ambiguous e¤ ect on) its stock price.
2. Recently, there was stronger-than-expected jobs growth. As a result stock markets went up when the news came out. This (would / would not ) be considered an argument against the e¢ cient markets hypothesis.
3. Suppose …nancial market participants expect a corporation to gain $5 per share, but the corporation gains only $4 per share. Holding everything else constant, according to the e¢ cient markets hypothesis, the price of the stock will (increase / decrease / be unchanged ) when the $4 per share gain is announced.
4. Suppose a company decides to retain a higher percentage of earnings so that its dividend payment to stock-holders decreases. “Lower dividends means that stock prices will decrease.” This statement is (true / false).
Holding everything else constant, the increase in retained earnings would decrease stock prices.
However, a change in retained earnings often leads to a change in perception of growth rate of dividends. If g increases, stock prices would tend to increase. The net result will be an ambiguous e¤ ect on stock prices.
SHORT ANSWERS
NO CREDIT WILL BE GIVEN FOR JUST STATING THE CORRECT ANSWER.
1. Suppose you observe that after a …rm makes an unanticipated earnings announcement, there is an immediate jump in the stock price and then the price keeps drifting for a while after the announcement. Is this consistent with the e¢ cient markets hypothesis? Explain.
No it is not. If there is a predictable change in stock prices then you should be able to predict it. After an unexpected, say positive, earnings…...

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