Fundamentals of Corporate Finance Third edition Chapter 12 Corporate Brealey Myers Marcus Financing and the lessons of ndamentals of Corporate Finan Market Efficiency Brealey Myers Marcus slides by Matthew will IrwinMcGraw-Hill CThe McGraw-Hill Companies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 12- 1 Irwin/McGraw-Hill Chapter 12 Fundamentals of Corporate Finance Third Edition Corporate Financing and the Lessons of Market Efficiency Brealey Myers Marcus slides by Matthew Will Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc.,2001
12.2 Topics Covered SInvestment Decision VS Financing Decision MArket Efficiency → Weak form efficiency )Semi-strong form efficiency )Strong form efficiency LEssons of market efficiency Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 12- 2 Irwin/McGraw-Hill Topics Covered Investment Decision vs. Financing Decision Market Efficiency ➔Weak form efficiency ➔Semi-strong form efficiency ➔Strong form efficiency Lessons of Market Efficiency
12.3 Investment vS Financing S Investment decision are made based on the risk of the project, with total disregard for how the project will be financed(flotation costs being the exception O Financing decisions are made based on the conditions in the capital markets, with little consideration for the investment being made (project specific funding being the exception IRBs are a good example) Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 12- 3 Irwin/McGraw-Hill Investment vs. Financing Investment decision are made based on the risk of the project, with total disregard for how the project will be financed (flotation costs being the exception). Financing decisions are made based on the conditions in the capital markets, with little consideration for the investment being made (project specific funding being the exception. IRBs are a good example)
12.4 Market Efficiency Market Eficiency Theory Capital markets reflect all relevant information. You cannot consistently earn excess profits MONEY Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 12- 4 Irwin/McGraw-Hill Market Efficiency Theory Capital markets reflect all relevant information. You cannot consistently earn excess profits. Market Efficiency
12.5 Market Efficiency Efficient Capital Markets- Financial markets in which security prices rapidly reflect all relevant information about asset values Random Walk - Security prices change randomly, with no predictable trends or patterns Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 12- 5 Irwin/McGraw-Hill Market Efficiency Efficient Capital Markets - Financial markets in which security prices rapidly reflect all relevant information about asset values. Random Walk - Security prices change randomly, with no predictable trends or patterns