Eugene Fama Theory on Efficient Market Hypothesis (EMH), Singapore

QUESTION

1. Market efficiency was developed in 1970 by Economist Eugene Fama whose theory on efficient market hypothesis (EMH), stated that it is not possible for an investor to outperform the market because all available information is already built into all stock prices. Discuss why a financial decision maker such as a corporate treasurer or CFO should be concerned with market efficiency.
2. Empirical evidence indicates that stock price declines with the announcement of seasoned equity offerings. Discuss the possible reasons why the stock price typically drops on the announcement of a seasoned new equity issue.
3. Google search of the phrase “beat the market” yields more than 14 million results. Many are investing and trading strategies that promise to outperform a market benchmark. The idea of generating market-beating returns is pervasive. Suppose you invest in the stock market and double your money in a single year while the market, on average, earned a return of only about 15%. Is your performance a violation of market efficiency? Explain.
4. Horseshoe Corporation is planning to raise fresh equity capital by selling a large new issue of common stock. Horseshoe, a publicly traded corporation, is trying to choose between an underwritten cash offer and a rights offering (not underwritten) to current shareholders, Horseshoe’s management is interested in maximising the wealth of current shareholders and has asked you for advice on the choice of issue method. What is your recommendation? Explain