Chapter 13 Flashcards
What are corporations?
A way of organising people to produce goods and services
3 features of a corporation?
- owners not necessarily managers (executive members are both managers and owners)
- can be closely held (family) or widely (public)
- limited liability (unlike partnerships)
What does limited liability mean?
Investors can only lose what they invest, done to encourage investment
See rest of L1 intro stuff
now
See example at top of CH13 notes
now
Explain the difference between financing and investment decisions?
Investment decisions are simpler (F decisions have lots of different strategies), F decisions are easier
Why are financing decisions easier? (2)
- Less degree of finality (easier to reverse)
- Difficult to make money by F strategies due to higher competitiveness tf not looking for a positive NPV
Explain why markets are considered efficient?
Prices of stocks appear to follow a random walk (ie. successive changes in value are independent) tf odds of going up or down are the same day-day
Why is there no day-day trend in stock markets?
As soon as cycles/trends are recognised by investors, they buy(/sell) until the price is pushed up(/down) tf eliminating the trend, tf stock once again offers normal risk-adjusted rate of return
What would happen if past prices -> prediction of future prices?
->easy profits which can’t happen in a competitive market tf ALL (not just price) info will be reflected in today’s prices, not tomorrow’s tf RW tf market efficiency
What is weak market efficiency and what is its implication?
When prices reflect information contained in record of past prices
Makes it impossible to make consistent SNP (RW)
What is semistrong market efficiency and what is its implication?
Prices reflect not only all info in past prices, but also all other public information
Prices respond immediately to the release of public information (eg. merger proposal)
What is strong market efficiency and what is its implication?
Prices reflect all info regarding analysis of company, economy etc (public +private info)
Will find lucky and unlucky investors but no one who can consistently profit off market
Read iii top of page 1 side 2
shows need to account for market movements
What does figure 13.4 show regarding takeover announcements?
Shows stock price jumps on day of announcement then is normal again
May drift up before if investors are expecting a takeover