Finance research has shown that managers of actively managed mutual funds or exchange traded funds (ETF), on average, do not outperform the overall stock market as measured by the S&P 500 index . In some years, more than 80% of fund managers were unable to beat the overall stock market return. The year 2013 is a good example when the S&P 500 yielded nearly 29% return, which was better than the average return on 95% of actively managed stock portfolios with similar risk. (a) If you believe these results which seem to support informational efficiency of equity markets in U.S., what would be your investment strategy so that your average long-run returns are better than the returns realized by more than two-third (75%) of professional money managers of actively traded funds. Explain. (b) If equity markets are informationally efficient and rational to a larger extent, how would you explain the stock market bubble of 2008 in the presence of efficient markets
A diversified company has decided to use its overall firm WACC as a performance benchmark for rating its divisional managers and to decide whether new projects from its three divisions should be funded for investment capital. The firm WACC is 12%. The divisional WACCs for its high risk, average risk, and low risk divisions are 16%, 11.9%, and 8%, respectively. Please explain the pros and cons of using the firm WACC in evaluating its divisional managers and projects. Remember that WACC can be interpreted as a hurdle rate or the minimum acceptable return
On July 16, 2018, you tuned into CNBC financial TV channel and watched different financial analysts discussing the current valuations of Amazon, Apple, Google, Goldman Sachs, and the overall U.S. and European stock markets. However, you are puzzled because these analysts could not agree on the current valuations and end-of-year price targets for the four companies and overall stock market. For example, two analysts argued that Amazon and Goldman Sachs (an investment bank) are currently overvalued, while others reached the opposite conclusion. Their end-of-the-year stock price targets for the four stocks and overall market also varied widely. Please solve this puzzle and explain how these analysts (and stock analysts in general) can reach such very different conclusions on stock valuations and price targets.
Apple, Inc. (AAPL) announced in 2013 a 7-for-1 stock split. Similarly, many other publicly traded companies have announced stocks splits. Most stock holders as well as some analysts and traders believe that a stock split would definitely benefit current shareholders and raise the firm’s overall market value. You read in chapter 14 that, in theory, a 7:1 split would increase the number of outstanding shares seven fold and cut down the post-split stock price to 1/7 of pre-split price, thus leaving Apple’s shareholders’ wealth unchanged. This theory asserts that stock prices should increase only when a firm generates more earnings (cash flows) which will raise earnings per share. But stock splits do not generate any additional earnings (cash flows) for the firm. So you are puzzled why some shareholders, traders, and analysts adamantly believe that stock splits benefit shareholders. Please explain whether or not stock splits in general would benefit a firm’s current shareholders with at least a 5-year investment (holding) horizon. You would want to use your understanding of chapter 14 stock split material, especially the signaling aspects of stock splits, optimal stock price range theory, and past empirical evidence in your explanation.
After the severe 2008 stock market crash, an increasing number of publicly traded firms announced stock buyback (repurchase) programs. Most analysts are also predicting that many firms will use the money saved due to the 2018 tax law to repurchase their stock or pay dividends. Please explain what benefits or rationale, if any, firms see in stock repurchases and how would investors react to these repurchase programs. You would want to use your understanding of chapter 14 stock repurchase discussion in your answers.
The M& M capital structure theories in chapters 15 and 21 persuasively argue that the optimal long-term debt is not a 0.0% debt. consistent with M&M theories, the average long-run debt to equity ratio in many different industries is positive (e.g., 14% for info technology, 38% for energy, and 80% for utilities). Yet some technology firms, such as Facebook, Alphabet (Google), and Apple, do not use any long-term debt or almost 0.0% LT debt. Please explain whether it makes financial sense for such firms to use no debt. You would want to use your understanding of capital structure material, especially signaling theory, R&D under asymmetric information theory, financial distress costs, and debt tax shield in your answers.