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Solutions to Lectures on Corporate Finance, Second Edition

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Solutions to Lectures on Corporate Finance, Second Edition
Peter Bossaerts and Bernt Arne Ødegaard 2006

LECTURES ON CORPORATE FINANCE - (Second Edition) © World Scientific Publishing Co. Pte. Ltd. http://www.worldscibooks.com/economics/6188.html

Contents
1 Finance 2 Axioms of modern corporate finance 3 On Value Additivity 4 On the Efficient Markets Hypothesis 5 Present Value 6 Capital Budgeting 7 Valuation Under Uncertainty: The CAPM 8 Valuing Risky Cash Flows 9 Introduction to derivatives. 10 Pricing Derivatives 11 Pricing of Multiperiod, Risky Investments 12 Where To Get State Price Probabilities? 13 Warrants 14 The Dynamic Hedge Argument 15 Multiple Periods in the Binomial Option Pricing Model 16 An Application: Pricing Corporate …show more content…

4.6 Investing? [3] Does the following statement make sense in view of the Efficient Markets Hypothesis (EMH)? The Japanese economy has deep structural problems, which the Japanese seem reluctant to overcome. We do not see any major change in this situation over the next two to three years. Hence, we advise against investing in the Tokyo stock market, because we expect returns to be below average for the next two to three years.

LECTURES ON CORPORATE FINANCE - (Second Edition) © World Scientific Publishing Co. Pte. Ltd. http://www.worldscibooks.com/economics/6188.html

On the Efficient Markets Hypothesis

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Solutions
4.1 Interest Rates [2] Remember the first lesson about market efficiency: Markets have no memory. Just because long-term interest rates are high relative to past levels does not mean that they won’t go higher still. Unless you have special information indicating that long-term rates are too high, issuing long-term bonds should be a zero-NPV transaction. So should issuing short-term debt or common stock. 4.2 Semistrong [3] All of these are public information, you do not expect them to explain future changes in stock price. Hence, you can not expect to make excess returns using this information. You can only use private information to generate excess returns. 4.3 UPS [3] Once the announcement is made and the price has reacted (downward) to the lower (discounted) future dividend stream, there is no

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