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Chapter 5: 11DQ (page 471)

The efficient market hypothesis is interpreted in a weak form, a semi strong form, and a strong form. How can we differentiate its various forms?

Short Answer

Expert verified

The differentiation of various forms is done on the basis of information associated with the prices.

Step by step solution

01

Efficient market hypothesis

Efficient market hypothesis is associated with financial economicsthat indicates that prices of assets depict all the information available.

02

Differentiation among the versions of efficient market hypothesis

Differentiation among various forms can be done in the following manner:

  • If past price information is not useful for future prices, then it indicates the weak form,
  • If prices reflect all public information, it indicates semi-strong form, and
  • If all the information is reflected in the stock prices, it states the strong form of an efficient market hypothesis.

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Most popular questions from this chapter

The Wrigley Corporation needs to raise \(44 million. The investment banking firm of Tinkers, Evers & Chance will handle the transaction.

  1. If stock is utilized, 2,300,000 shares will be sold to the public at \)20.50 per share. The corporation will receive a net price of \(19 per share. What is the percentage underwriting spread per share?
  2. If bonds are utilized, slightly over 43,700 bonds will be sold to the public at \)1,009 per bond. The corporation will receive a net price of $994 per bond. What is the percentage of underwriting spread per bond? (Relate the dollar spread to the public price.)
  3. Which alternative has the larger percentage of spread? Is this the normal relationship between the two types of issues?

Becker Brothers is the managing underwriter for a 1.45-millon-share issue by Jay’s Hamburger Heaven. Becker Brothers is “handling” 10 percent of the issue. Its price is \(27 per share, and the price to the public is \)28.95.

Becker also provides the market stabilization function. During the issuance, the market for the stock turns soft, and Becker is forced to purchase 50,000 shares in the open market at an average price of \(27.50. It later sells the shares at an average value of \)27.20.

Compute Becker Brother’s overall gain or loss from managing the issue.

Question: The management of Mitchell Labs decided to go private in 2002 by buying in all 2.80 million of its outstanding shares at \(24.80 per share. By 2006, management had restructured the company by selling off the petroleum research division for \)10.75 million, the fiber technology division for \(8.45 million, and the synthetic products division for \)20 million. Because these divisions had been only marginally profitable, Mitchell Labs is a stronger company after the restructuring. Mitchell is now able to concentrate exclusively on contract research and will generate earnings per share of $1.10 this year. Investment bankers have contacted the firm and indicated that if it re-entered the public market, the 2.80 million shares it purchased to go private could now be reissued to the public at a P/E ratio of 15 times earnings per share.

c. What is the percentage return to the management of Mitchell Labs from the restructuring? Use answers from parts a and b to determine this value

What method of “bond repayment” reduces debt and increases the amount of common stock outstanding? (LO16-3)

What was the primary purpose of the Securities Act of 1933?

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