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Business Finance Exam 3 Verbatim Questions and Answers 2024
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Business Finance Exam 3 Verbatim Questions
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Business Finance Exam 3 VerbatimQuestions
Genocea announces pulling one of its leading drugs from market, owing to its potential
side effects. Its future expected earnings will decline by $80 million per year forever.
Genocea has 100 million shares outstanding & equity cost of capital of 8%.
If news surprised investors, what happens to Genocea stock price @ announcement?
A. Immediate decline by $0.80 in stock price
B. Gradual decline by $0.80 in stock price
C. Immediate decline by $10 in stock price
D. Gradual decline by $10 in stock price - answerC
80 mil/100 mil shares = .80 per share
.80/.08 = $10 decline
Market efficiency implies that stock prices cannot deviate from true values.
A. True B. False - answerB
Market efficiency implies that no one can beat market in the short or long term.
A. True B. False - answerB
Which of following is consistent with stock market exhibiting strong-form efficiency?
A. Trading on past price patterns such as candlestick charts is profitable
B. New information made public is not instantaneously reflected in stock prices
C. Illegal insider trading is not a profitable activity
D. Extracting information from firms' existing financial statements produces profitable
trading strategies - answerC
Exactly a week ago, Merck Inc. announced to public that it faces a decline in earnings
as a result of which it expected to pay $25 million less in dividends for each of the next
5 years than it had previously intended. If the stock market exhibits semi-strong
efficiency, how will Merck's stock price react today to this announcement?
A. Decrease
B. Increase
C. No reaction
D. This cannot be determined with information provided - answerC
If the market exhibited weak-form efficiency, trading strategies that were based on past
price-patterns (e.g. candlestick charts) would be profitable.
A. True
, B. False - answerB
Merk Inc. announces to public that it faces a decline in earnings forcing it to pay $25
million less in dividends for each of the next 5 years than it had previously intended.
Merk's shares react immediately to this announcement by decreasing to fully reflect the
reduction in dividends. We can deduce from this that market:
A. Exhibits weak-form efficiency
B. Exhibits semi-strong-form efficiency
C. Exhibits strong-form efficiency
D. Is not efficient - answerB
Roybus just reported that Taiwan production facility destroyed in fire. Although plant
was insured, loss will decrease Roybus FCFF by $180 million @ end this year & by $60
million @ end next year. Assume no change in debt. If Roybus has 35 million shares &
cost of capital 13%, change in Roybus stock price upon announcement? -
answerAnswer: Change in V = -206, so if debt value does not change, P drops by
206/35 = $5.89 per share.
Roybus just reported that Taiwan production facility destroyed in fire. Although plant
was insured, loss will decrease Roybus FCFF by $180 million @ end this year & by $60
million @ end next year. Would you make profit if you sell Roybus on hearing this
announcement? - answerIf this is public information, in an efficient market the share
price will drop immediately to reflect the news, and no trading profit is possible.
Genocea is about to announce results of clinical trials of a shingles vaccine. If trials
successful, Genocea stock price $70. If trials unsuccessful, stock price $18. Suppose
morning before announcement trading @ $55. What is investors expectation about trial
success? PS5, 8 - answerThe market seems to assess a somewhat greater than 50%
chance of success because good news would produce a price of $70 and bad news
would produce a price of $18. Good news seems more likely.
Genocea is about to announce results of clinical trials of a shingles vaccine. If trials
successful, Genocea stock price $70. If trials unsuccessful, stock price $18. Suppose
morning before announcement trading @ $55. If Bill Ackman's hedge fund hired
scientists to examine drug potential, could he profit by trading stock? PS5, 8 -
answerYes, if they have better information than other investors.
Genocea is about to announce results of clinical trials of a shingles vaccine. If trials
successful, Genocea stock price $70. If trials unsuccessful, stock price $18. Suppose
morning before announcement trading @ $55. Which factors could limit Ackman's ability
to profit? PS5,8 - answerMarket may be illiquid—no one wants to trade if they know
Kliner has better information. Kliner's trades will move prices significantly, limiting
profits.
Consider the following five monthly returns:
0.05 -0.02 0.04 0.08 -0.01
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