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1 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Corporate Finance, 12e (Ross) Chapter 14 Efficient Capital Markets and Behavioral Challenges 1) Which one of these is the best means of creating a valuable financing opportunity? A) Reduce a tax subsidy B) Fool investors in an efficient market C) Create a new security to meet the needs of an unsatisfied clientele D) Issue new securities in a market niche of satisfied clientele E) Create new securities to minimize tax benefits Answer: C Difficulty: 1 Easy Section: 14.1 Can Financing Decisions Create Value? Topic: Market efficiency - implications Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 2) An efficient capital market is one in which: A) brokerage commissions are zero. B) taxes are irrelevant. C) securities always offer a positive NPV. D) all investments earn the market rate of return. E) security prices reflect all available information. Answer: E Difficulty: 1 Easy Section: 14.2 A Description of Efficient Capital Markets Topic: Market efficiency - foundations and types Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 3) The notion that actual capital markets, such as the NYSE, are fairly priced is called the: A) efficient market Hypothesis (EMH). B) law of one price (LOP). C) open markets theorem (OMT). D) laissez-faire axiom. E) monopoly pricing theorem (MPT). Answer: A Difficulty: 1 Easy Section: 14.2 A Description of Efficient Capital Markets Topic: Market efficiency - foundations and types Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation
2 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 4) Which of the following are conditions that Andrei Shleifer presents as the conditions that create market efficiency? A) Arbitrage, independent deviations from rationality, rationality B) Competition, arbitrage, and rational investors C) Rational investors, dependent deviations from rationality, and competition D) Wide public access to information, rational investors, and arbitrage E) Professional investors, easy access to information, rational independent investors Answer: A Difficulty: 1 Easy Section: 14.2 A Description of Efficient Capital Markets Topic: Market efficiency - foundations and types Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 5) Individuals that continually monitor the financial markets seeking mispriced securities: A) tend to make substantial profits on a daily basis. B) tend to make the markets more efficient. C) are never able to find a security that is temporarily mispriced. D) are always quite successful using only well-known public information as their basis of evaluation. E) are always quite successful using only historical price information as their basis of evaluation. Answer: B Difficulty: 1 Easy Section: 14.2 A Description of Efficient Capital Markets Topic: Market efficiency - foundations and types Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 6) Market efficiency requires: A) arbitrage conducted by irrational investors. B) the absence of arbitrage. C) speculation by amateur investors. D) all investors to be rational. E) countervailing irrationalities. Answer: E Difficulty: 1 Easy Section: 14.2 A Description of Efficient Capital Markets Topic: Market efficiency - foundations and types Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation