Few questions

[dawg87]

Hi guys, i really need some additional information from you guys here in regards to these questions. Any input would be greatly appreciated. Thank you for your time.

1) Explain the interactions between market efficiency, capital budgeting, and the cost of capital.

2) Suppose your firm is going to finance a new project 100% with retained earnings. Your boss claims that since the earnings are already being retained and that since no outside financing is required, the project should be evaluated at the risk-free rate of return. Is this appropriate? Are retained earnings risk-free? Why or why not?

I know retained earnings are part of equity and they tend to effect stock prices and hence they are not risk free. if someone can elaborate on it that would be awsome.

3) The Government has insider trading laws which punish individuals who trade in the securities markets using information that is not publicly known. Explain how these laws might affect the degree of market efficiency that currently exists in our capital markets.

4) Explain why it is that in an efficient market, investments have an expected NPV of zero.

 

[Deleted member 4993]

Hi guys, i really need some additional information from you guys here in regards to these questions. Any input would be greatly appreciated. Thank you for your time.

1) Explain the interactions between market efficiency, capital budgeting, and the cost of capital.

2) Suppose your firm is going to finance a new project 100% with retained earnings. Your boss claims that since the earnings are already being retained and that since no outside financing is required, the project should be evaluated at the risk-free rate of return. Is this appropriate? Are retained earnings risk-free? Why or why not?

I know retained earnings are part of equity and they tend to effect stock prices and hence they are not risk free. if someone can elaborate on it that would be awsome.

3) The Government has insider trading laws which punish individuals who trade in the securities markets using information that is not publicly known. Explain how these laws might affect the degree of market efficiency that currently exists in our capital markets.

4) Explain why it is that in an efficient market, investments have an expected NPV of zero.

Are you saying you have no idea about the "stuffs" that are being discussed in question 1?

Start with defining those terms.

Tell us what do you know about those terms.

 

[dawg87]

Efficient market is one where the market price is an unbiased estimate of the true value of the investment.

Capital budgeting is the process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing by assessing a prospective project's lifetime cash inflows and outflows to determine whether the returns generated meet a sufficient target benchmark.

The cost of capital is the required return necessary to make a capital budgeting project, such as building a new factory, worthwhile. Cost of capital includes the cost of debt and the cost of equity.

I want to get clarification on the interaction part between all 3.