Assuming that the split conveys no new information about the company, what is the value of the company, the number of shares outstanding, and price per share after the split?

Answer questions based on the textbook

Chapter 6 questions

6. Sarah is an avid reader of Smart Investing magazine
that provides the latest news and trends in the stock
market. Based on the most updated information, it is
advisable to sell the technology stocks. Discuss.

7. Stuart’s stockbroker has called him up to advise him
to buy the real estate stocks as there has been a prop-
erty boom in Manhattan recently. The broker has an
excellent track record. Advise Stuart.

Quantitative questions

1. Verizon Wireless has just announced a 2-for-1 stock
split, effective immediately. Prior to the split, Verizon
Wireless had a market value of $10 billion with 200
million shares outstanding. Assuming that the split
conveys no new information about the company,
what is the value of the company, the number of
shares outstanding, and price per share after the
split? If the actual market price immediately follow-
ing the split is $34.00 per share, what does this tell
us about market efficiency?

2. If the public expects the Microsoft Corporation to
increase $10 a share this quarter and it actually
increases $6, which is still one of the largest gains in
the history of the company, what does the efficient
market hypothesis say will happen to the price of the
stock when the $6 increase is announced?

Chapter 7

11. How does the free-rider problem aggravate adverse
selection and moral hazard problems in financial mar-
kets?

12. Describe the conflicts of interest that occur in banks
in Europe.

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