Achieving efficiency

Question 1

Explain in 525 words what it means to have efficient capital market, including:

• Describe the behavioral challenges in achieving efficiency.
• Discuss the three forms of market efficiency.
• What are the implications to corporate finance?
• Would you consider the real estate market an efficient capital market? Please explain why or why not.

Question 2

Answer these in at least 100 words per question.

• Describe an efficient capital market for stocks?
• Compare and contrast the weak form of market efficiency with the strong and semi-strong forms?
• Explain the relevance of market efficiency for financial managers?
• Distinguish how maximizing the value of the corporation differs from maximizing shareholder interests?
• Explain how leverage can improve returns to the shareholders?
• Describe the impact of corporate taxes on the weighted average cost of capital?
• Distinguish between direct and indirect costs in a corporate bankruptcy?
• Describe agency costs and the impact on bondholders?

Question 3

Answer each question

• Describe how net present value is used in the financial decision making process.

• Explain the disadvantages of using the payback method.

• Compare and contrast the internal rate of return (IRR) method from the net present value method (NPV)

• Review the financial considerations a company should make before investing in a project.

• Understand how net working capital, depreciation and interest influence the decision to buy or not to buy.

• Explain how inflation and interest rates affect the capital budgeting process.

• Describe how the options to expand or abandon a project are integrated in the capital budgeting process.

• Explain how decision trees are used to value investment alternatives.