Problem Set 1 Flashcards
Explain in your own words, why financial statement analysis does not pay off for investors when capital markets are strongly information efficient. Under which conditions does financial statement analysis pay off for investors?
Financial analysis does not pay off in this case because all information is priced in, stocks are fairly priced. Under strong information efficiency there are no gains to collecting and analysing additional info about firms.
It pays off when the market is not completely informationally efficient as this implies that the price is not at fair value.
Explain the unravelling principle in your own words.
The unravelling principle states that firms will disclose all their private information when investors rationally interpret non-disclosure of news as bad news.
- Disclosure is costless
- Investors know that firms have private information
- All investors interpret the same information in the same way
- Managers want to maximize share price
- Firms credibly disclosure their information
Explain the ranges for overvalued and undervalued.
0->k represents firms that are overvalued because info disclosure with costs doesn’t increesae the price enough to justify it.
k->y/ are firms that are undervalued because disclosure leads to a price increase.
How would you solve this?
Should follow the same steps as this.
Do question c)
Follow these steps. Note that it is P(BN|L) in the table and that you are solving P(L|BN) in the question.
What are porters five forces?
d) the threat of substitute products and increasing buyer power likely put pressure on deregulating the environment
e) There is a threat of new entrants and threat of substitute products.
f) bargaining power of suppliers
g) bargaining power of buyers and competition among existing firms
Do b)
Answer d)
