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1) Nanotech, a microchip development and research firm, announced this morning that it has hired the world's most knowledgeable researchers on nanotechnology

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1) Nanotech, a microchip development and research firm, announced this morning that it has hired the world's most knowledgeable researchers on nanotechnology. Before today, Nanotech's stock had been selling for $100. Assume that no other information is received over the next week and the stock market as a whole does not move.

a) What do you expect will happen to Nanotech's stock?

b) Consider the following scenarios:

(i) The stock price jumps to $118 on the day of the announcement. In subsequent days it floats up to $123, then falls back to $116.

(ii) The stock price jumps to $116 and remains at that level.

(iii) The stock gradually climbs to $116 over the next week.

Which scenario(s) indicate market efficiency? Which do not? Why?

 

2) Which form of market efficiency is violated in each of these scenarios?

a) You make money each time you buy a stock after its price has risen by 2 percent and sell the stock one month later.

b) You make money on day 1 after a higher-than-expected earnings announcement and sell the stock five days later.

c) You consistently make money by buying value stocks and selling short growth stocks.

 

3) Janetta Corp. has an EBIT of $975,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 14 percent, and the corporate tax rate is 35 percent. The company also has a perpetual bond issue outstanding with a market value of $1.9 million.

a) What is the value of the company?

b) The CFO of the company informs the company president that the value of the company is $4.8 million. Is the CFO correct?

 

4) Lee Ann Inc. has declared a $5.60 per share dividend. Suppose capital gains are not taxed, but dividends are taxed at 15 percent. Lee Ann sells for $75 per share, and the stock is about to go ex-dividend. What do you think the ex-dividend price will be? Explain.