Principles of cororate finance 6th brealey myers chapter 13

 Corporate Financing and the Six Lessons of Market Efficiency Slides by...  What is an Efficient Market? Efficient Market Theory  The Evidence on Market Efficiency  Six Lessons of

 Corporate Financing and the Six

Lessons of Market Efficiency

Slides by

 What is an Efficient Market?

 Efficient Market Theory

 The Evidence on Market Efficiency

 Six Lessons of Market Efficiency

 These discount rates are risk adjusted.

 The risk adjustment is a byproduct of market

established prices.

 Adjustable discount rates change asset values.

The government is lending you $100,000 for 10 years at 3% and only requiring interest payments prior to maturity Since 3% is obviously below market, what is the value of the below market rate loan?

repayment loan

of PV -

pmts interest

of PV

- borrowed amount

NPV 

The government is lending you $100,000 for 10 years at 3% and only requiring interest payments prior to maturity Since 3% is obviously below market, what is the value of the below market rate loan?

Assume the market return on equivalent risk projects is 10 %.

012 ,

43

$

988 ,

56 000

, 100

) 10 1 (

000 ,

100 )

10 1 (

000 ,

3 000

, 00 1

day DO NOT reflect any pattern

 Statistically speaking, the movement of stock

prices is random (skewed positive over the long term).

5 yrs of the Coin Toss Game?

80 130 180

5 yrs of the Coin Toss Game?

80 130 180 230

 Market prices reflect all historical information.

 Semi-Strong Form Efficiency

information.

 Strong Form Efficiency

and private.

 Research the value of stocks using NPV and other measurements of cash flow

 Forecast stock prices based on the watching the

watchers

watchers”).

Last This Next

-16 -11 -6 -1 4 9 14 19 24 29 34 39

Days Relative to annoncement date

-40 -30 -20 -10 0 10 20 30 40

Market Index

0 5 10 15 20

First Second Third Fourth Fifth

Year After Offering

1193 10

114

.

7

16 )

Div index

PV

1193 10

114

.

7

16 )

Div index

PV

928 096

114

.

7

16 )

Div index

PV

Trust market prices

Read the entrails

There are no financial illusions

The do it yourself alternative

Seen one stock, seen them all

0 5 10 15 20 25 30

Month relative to split

abnormal return %