1. When markets are efficient, the stock price is considered to be more than the
ID: 2731818 • Letter: 1
Question
1. When markets are efficient, the stock price is considered to be more than the intrinsic value of the stock.
a) more than
b) equal to
2. A pharmaceutical company announces that it has received Food & Drug Administration (FDA) approval for a new allergy drug that completely prevents hay fever. The consensus analyst forecast for the company’s earnings per share (EPS) is $5.00, and insiders agree with analyst expectations. They too expect that, with this new drug, earnings will drive the EPS to $5.00. If the markets are assumed to exhibit strong form efficiency, what will happen when the company releases its next earnings report?
a) There will be some volatility in the stock price when the earnings report is released; it is difficult to determine the impact on the stock price.
b) The stock price will not change, because the market had already incorporated the information about the FDA approval announcement in the stock price.
c) The stock price will increase and settle at a new equilibrium level.
3. The degree of market efficiency affects investors and market participants but has important implications for financial managers as well. In efficient markets, accounting adjustments that do not affect the firm’s expected cash flows or the risk of cash flows are --------- to affect the price of a security.
a) more likely
b) less likely
Explanation / Answer
ans 1- equal to - when there is efficient stock market that also means market has enough tradings and the stocks are trading equalling to its intrinsic value there is no undervalued stock in efficient market.
Ans 2- market had already absorbed this news and henece there will bo no change in the prices, stock marekt reflects with the news in the market since news ahd already broke earlier then reacting to the news stock prices would have been already adjusted.
ANS 3 - Stock price will be less likely to affect reason being is simple that market is efficient and sutomer has all the knowledge about the stock prices hence these accoutning adjustments will not have any bearings on their decision thus it will be less likely to change the security price
ns 3 -
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