Explanation Of The Efficiency Market Hypothesis - Accounting and Finance Assignment Help

Assignment Task

Question 6 (10%) Group Assignment

Interpretation of the Simple Linear Regression equation.
Question 7 (10%) Ethics

Find a real life example and apply the 8 steps to sound ethical decision making suggested by Trevino and Nelson. Your explanation may be similar in format to the Moody and S&P case in “Case Discussion 2” in the lecture, but you must not use any of the cases from the lecture slides.
Question 8 (Ch10)

Explanation of the Efficiency Market Hypothesis (EMH).

Answer(slide):
Efficiency Market Hypothesis (EMH).
• There are many investors out there doing research.
As new information comes to market, this information is analysed and trades are made based on this information.
Therefore, prices should reflect all available public information.
• If investors stop researching share prices, the market will no longer be efficient.

• EMH doesn’t mean that you can’t make money.
• EMH does mean:
On average, you will earn a return appropriate for the risk undertaken.
There is no bias in prices that can be exploited to earn excess returns.
Market efficiency will not protect you from wrong choices if you do not diversify—you still don’t want to put all your eggs in one basket. 
Question 9 (Ch13)
Explanation of the various views of optimal capital structure.
Answer(slide):

• Static theory of capital structure 
The theory that a firm borrows up to the point where the tax benefit from an extra dollar in debt is exactly equal to the cost that comes from the increased probability of financial distress.
• D/E ratio probability of liquidation 
• probability expected liquidation costs
At some point, the additional value of the interest tax shield will be offset by the expected liquidation costs.
At this point, the value of the firm will start to decrease and the WACC will start to increase as more debt is added.
• Case I: no taxes or bankruptcy costs
No optimal capital structure
• Case II: corporate taxes but no bankruptcy costs
Optimal capital structure = 100% debt.
Each additional dollar of debt increases the cash flow of the firm.
• Case III: corporate taxes and bankruptcy costs
Optimal capital structure is part debt and part equity.
Occurs where the benefit from an additional dollar of debt is just offset by the increase in expected bankruptcy costs.

Question 10 (Ch 14)

Explanation of the relevance or irrelevance of Dividend policy based on real world factors.

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