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.

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