Last saved by: Windows User

1)Describe an efficient capital market for stocks

ANS: The efficient capital market for stocks, also known a EMH is a theory that at any point in time in a market that the security prices reflect all of the information. The are vary degrees of this hypothesis with weak, semi-strong, and strong (Ross, Westerfield, Jaffe & Jordan, 2016). Weak means that it reflects all of the current information and has no relationship with future prices. Semi-strong is where the prices of the stock are released to the public very quickly, it has factored in market and non-market information, Lastly, strong means that the prices of the stock reflect all of the public and private information on that stock. 

2. Compare and contrast the weak form of market efficiency with the strong and semi-strong forms

ANS:Weak means that it reflects all of the current information and has no relationship with future prices. Semi-strong is where the prices of the stock are released to the public very quickly, it has factored in market and non-market information, Lastly, strong means that the prices of the stock reflect all of the public and private information on that stock. 

3. Define and explain capital asset pricing model

ANS:Capital asset pricing model, also called CAPM is a form of calculation, which calculate the rate of return for a risky asset. The calculation will show the increase in value that the investor should expect based on the risk level of the asset. This calculation is helpful is using when an investor wants to know what price they should pay for a particular stock and can look at the risk levels between certain stocks. This helps to determine what the fair price should be for that investment, which is extremely useful for investors. 

4. Explain how leverage can improve returns to the shareholders.

ANS:Leverage is a type of strategy where the company uses borrowed money to increase the return of investment. An example of this would be a business purchasing something at a price on borrow money, and then immediately turn around and sell it for more and then would poke money, even after paying back the borrowed money. This can improve returns to stockholders, because it can increase their return of their investment on the stock that was purchased.

5. Distinguish between direct and indirect costs in a corporate bankruptcy.

ANS:The direct costs of bankruptcy are costs that result in the filing of bankruptcy for  a business. The business would need to liquidate assets, and they would incur costs such as legal costs, accounting costs, and loss of tax benefits. The indirect costs are costs that are associated with distress. These types of costs are costs that hurt the business based on filing the bankruptcy and the affects such as loss of creditors, loss of employees, loss of lending from lenders, and the loss of trust with customers.

6. What is the pecking order theory?  Is the pecking order relevant? Why?

ANS:Pecking order theory is the cost of financial increases with asymmetric information. How a company raises new capital and how to fund those without raising equity as the first option. Many businesses raise equity to raise more capital and there are other options. The type of debt is important to investors  and shows how the investors view the firm as a option to invest in. Many investors prefer a business to use internal financing. This theory is that a business uses the best financial option for investors to continue to attract investments. 

7. Distinguish dividends and stock splits.  Which factors influence dividend payout?

ANS:Dividends and stock splits do not distribute assets or change the investment of the investor - but they do change the equity of the accounts. The dividends are payments to the shareholders of additional shares - not cash, these can also be called bonus shares. Therefore the investor will receive more stocks than purchased. The stock split is where the stock has a reduction in the per value share of the stock. So the the change here is the value of the share. 

8. Describe agency costs and the impact on bondholders.

ANS:Agency costs are the costs associated with an agent using company money for their own benefit or the cost of techniques to prevent the agent from using money for their own interests. Many times corporations will offer bonuses and shares to provide monetary incentives. This will be a lower cost than that of allowing management to act in their own interests. This affects bondholders because it can take a toll on the share price. If the corporation has a lot of debt, it can severely affect the shareholders and bondholders.