PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 13, Problem 9PS
Market efficiency evidence* Which of the following observations appear to indicate market inefficiency? Explain whether the observation appears to contradict the weak, semistrong, or strong form of the
- a) Tax-exempt municipal bonds offer lower pretax returns than taxable government bonds.
- b) Managers make superior returns on purchases of (heir company’s stock.
- c) There is a positive relationship between (he return on the market in one quarter and the change in aggregate profits in the next quarter.
- d) There is some evidence that stocks that have appreciated unusually in the recent past continue to do so in the future.
- e) The stock of an acquired firm tends to appreciate in the period before the merger announcement.
- f) Stocks of companies with unexpectedly high earnings appear to offer high returns for several months after the earnings announcement.
- g) Very risky stocks on average give higher returns than safe stocks.
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TRUE OR FALSE
Answer as either true or false and provide a reason for why.
When a company pays dividends, its share price falls.
Modigliani and Miller proposition II (without taxes) implies that the weighed average cost of capital increases as more debt is issued, since debt make the firm more risky
The empirical findings that more profitable firms have lower debt ratios is consistent with the trade-off theory regarding capital structure.
The WACC formula assumes that the amount of debt issued remains constant.
Other things being equal, buying a put option is the same as selling a call option
Which of the following situation in which the quality of the company’s pay-out to shareholders may decline
a. Decrease in cash position
b. Increase in positive NPV investment opportunities
c. Increase in capital gains tax
d. Decrease in marginal tax rate on dividends
Which of the following concepts tells us that dividends are to be paid only when the capital budget has been already supplied?
a. Gordon Growth model
b. Dividend irrelevance theory
c. Retain Earnings break-point principle
d. Residual Dividend Model
Suppose that a new government is elected and it changes the law applying to firms to:• Allow dividend payments to be tax deductible• Stop interest expense on debt from being tax deductibleHolding other factors constant, and assuming that firms seek to maintain an optimal capital structure in accordance with trade-off theory, what would you expect to happen to the debt ratio of a firm with both equity and debt in its capital structure?a. An increase in the debt ratiob. A decrease in the debt ratioc. The debt ratio would be unchangedd. The debt ratio would doublee. None of the above or it is not possible to say
Chapter 13 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 13 - Market efficiency True or false? The...Ch. 13 - Prob. 2PSCh. 13 - Market efficiency Which (if any) of these...Ch. 13 - Prob. 4PSCh. 13 - Market efficiency How would you respond to the...Ch. 13 - Market efficiency Respond to the following...Ch. 13 - Prob. 7PSCh. 13 - Prob. 8PSCh. 13 - Market efficiency evidence Which of the following...Ch. 13 - Prob. 10PS
Ch. 13 - Prob. 11PSCh. 13 - Prob. 12PSCh. 13 - Market efficiency implications What does the...Ch. 13 - Prob. 14PSCh. 13 - Prob. 15PSCh. 13 - Abnormal returns Here are alphas and betas for...Ch. 13 - Prob. 18PSCh. 13 - Behavioral finance True or false? a. Most managers...Ch. 13 - Prob. 20PSCh. 13 - Prob. 21PSCh. 13 - Prob. 22PS
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- 1) When investors disregard their own information which is incomplete and follow the momentum activities of other market participants, they could inadvertently cause a financial bubble by transmitting inaccurate information with each additional trade. This phenomenon is called ______________. Multiple Choice Asymmetric information. Attribution bias. Systematic bias. Overconfidence. Information cascade. 2) Canada Revenue Agency requires firms to claim only one-half of the incremental capital cost of a new project in its first year for tax purposes. This rule is called the _________. Multiple Choice CCA rule. Half-CCA rule. Two-year rule. Half-year rule. Incomplete CCA rule. 3)Alternative ways of calculating operating cash flows are the bottom-up approach, the top-down approach, and the tax shield approach. True/False?arrow_forwardInvestments in large-cap stocks have historically earned lower returns than small-cap stocks. This suggests that _____________________. Data on small-cap stocks was less accurate than for large-cap stocks. Small-cap stocks were riskier than large-cap stocks and offer higher returns in compensation Small-cap stocks had better management than large-cap stocks Government subsidies available to small firms produced a positive effect on small-cap returnsarrow_forwardThe price-to-earnings ratio: ( al is of little value to investors these days due to the fact that market values far exceed camings values. b) is important to investors because a higher P/E ratio means lesser growth in earnings over time. C) develops an investor's knowledge of the price of various stocks in a single industry. d) is important to investors because a higher P/E ratio means greater growth in earnings over time.arrow_forward
- When considering a top-down approach to fundamental analysis, the impact of macroeconomic factors on a stock’s price can have which of the following effects? an increase in real GDP is followed by improvement in current and expected future profits for companies, leading to higher stock price. an increase in real GDP is followed by performance of industries and subsequent improvement in current and expected future profits for companies, leading to higher stock prices. an increase in real GDP, followed by a significant performance of cyclical industries such as automobile and consumer discretionary, will lead to higher stock prices.arrow_forwardExplain the following: The WACC is a weighted average of the costs of debt, preferred stock, and common equity.Would the WACC be different if the equity for the coming year came solely in the formof retained earnings versus some equity from the sale of new common stock? Would thecalculated WACC depend in any way on the size of the capital budget? How mightdividend policy affect the WACC? Assume that the risk-free rate increases. What impact would this have on the cost of debt?What impact would it have on the cost of equity? Note: Explain Shortly And To the Point Answerarrow_forwardWhich of the following statements is FALSE? Question content area bottom Part 1 A. Growth rate of the firm is higher, it is more optimal to have a higher level of debt relative to equity in the firm capital structure. B. Growth will affect the optimal leverage ratio even if the firm has positive earnings. C. When examining tax, the optimal debt level is proportional to its current earnings. D. The more unsure we are of EBIT the more chance that interest will exceed EBIT, if the interest expense is higharrow_forward
- **True/false questions ** a) APR interest includes compounding effect. b) Most M&As in U.S. history were friendly, and the payment method was often cash. c) Stock A has a higher expected return and lower variance than stock B. Including B in an efficient portfolio is questioned. d) In IPO pricing, dual - class stock tends to be undervalued compared to single - class stock. e) The value of a company is not independent of its structure due to the tax shieldarrow_forwardOrb Trust (Orb) has historically leaned towards a passive management style of its portfolios. The only model that Orb’s senior management has promoted in the past is the Capital Asset Pricing Model (CAPM). Now Orb’s management has asked one of its analysts, Kevin McCracken, CFA, toinvestigate the use of the Arbitrage Pricing Theory model (APT).McCracken has determined that a two-factor APT model is adequate where the factors are the sensitivity to changes in real GDP and changes in inflation. McCracken’s analysis has led him to the conclusion that the factor risk premium for real GDP is 8 percent while the factor risk premium for inflation is 2 percent. He estimates for Orb’s High Growth Fund that the sensitivities to these two factors are 1.25 and 1.5 respectively. Using his APT results, he computes the expected return of the fund. For comparison purposes, he then uses fundamental analysis to also computethe expected return of Orb’s High Growth Fund. McCracken finds that the two…arrow_forwardUsing Past Information to Estimate Required Returns Use online resources to work on this chapter's questions. Please note that website information changes over time, and these changes may limit your ability to answer some of these questions. Chapter 8 discussed the basic trade-off between risk and return. In the capital asset pricing model (CAPM) discussion, beta was identified as the correct measure of risk for diversified shareholders. Recall that beta measures the extent to which the returns of a given stock move with the stock market. When using the CAPM to estimate required returns, we would like to know how the stock will move with the market in the future, but because we dont have a crystal ball, we generally use historical data to estimate this relationship with beta. As mentioned in Web Appendix 8A, beta can be estimated by regressing the individual stock's returns against the returns of the overall market. As an alternative to running our own regressions, we can rely on reported betas from a variety of sources. These published sources make it easy for us to readily obtain beta estimates for most large publicly traded corporations. However, a word of caution is in order. Beta estimates can often be quite sensitive to the time period in which the data are estimated, the market index used, and the frequency of the data used. Therefore, it is not uncommon to find a wide range of beta estimates among the various Internet websites. 4. Select one of the four stocks listed in question 3 by entering the company's ticker symbol on the financial website you have chosen. On the screen you should see the interactive chart. Select the six-month time period and compare the stock's performance to the SP 500's performance on the graph by adding the SP 500 to the interactive chart. Has the stock outperformed or underperformed the overall market during this time period?arrow_forward
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