# Efficient Market Hypothesis

**3-1 EMH Assessment**

**Preparation**

Use the Capella library or the Internet to

research the Efficient Market Hypothesis, specifically taking note of the three

levels of market efficiency.

**Instructions**

Use your research to write a paper in which

you complete the following:

1.

Explain the Efficient Markets Hypothesis (EHM).

2.

Distinguish among the three levels of market efficiency.

3.

Briefly explain the implications of the EMH on financial

decisions.

4.

Use at least two research resources to support your ideas.

**Other Requirements**

·

**Length**: Your paper should be

1–2 typed, double-spaced pages. In addition, include a title page and

references page.

### 3-2

Unit 3 Problems Assessment

#### Overview

For

this assessment, you will apply the necessary knowledge to apply evaluations

principles and evaluate capital expenditure projects.

#### Instructions

For

this assessment, complete Problems 1–5. You may need an HP 10B II Business

Calculator to complete the following problems. You may use Word or Excel to

complete the assessments throughout this course, but you will find Excel to be

most helpful for creating spreadsheets.

##### Problem

3-1: Bond Valuation

You

have two bonds in your portfolio. Each bond has a face value of $1000 and pays

an 8 percent annual coupon. Bond X matures in 1 year, and Bond Y matures in 15

years.

1.

If the going interest rate is 4 percent, 9 percent, and 14

percent, what will the value of each bond be? Assume Bond X only has one more

interest payment to be made at maturity. Assume there are 15 more payments to

be made on Bond Y.

2.

The longer-term bond’s price varies more than the shorter-term

bond’s price when interest rates change. Explain why.

##### Problem

3-2: Yield to Call

Five

years ago, XYZ Inc. issued 20-year bonds with a 12 percent annual coupon rate

at their $1,000 par value. The bonds had 5 years of call protection and an 8

percent call premium. Yesterday, XYZ Inc. called the bonds.

For

this problem, imagine that the investor who purchased the bonds when they were

issued held them until they were called. Considering this, compute the realized

rate of return. Should the investor be happy with XYZ Inc. calling the bonds?

Why or why not?

##### Problem

3-3: Yield to Maturity

XYZ

Inc. bonds have 5 years left to maturity. Interest is paid annually, and the

bonds have a $1,000 par value and a coupon rate of 8 percent.

1.

What is the yield to maturity at a current market price of (1)

$800 and (2) $1,200?

2.

If a “fair” market interest rate for such bonds was 12

percent—that is, is rd=12%—would you pay $800 for each bond? Why or why not?

##### Problem

3-4: After-Tax Cost of Debt

The

XYZ Inc.’s currently outstanding bonds have a 10 percent yield to maturity and

an 8 percent coupon. It can issue new bonds at par that would provide a similar

yield to maturity. If its marginal tax rate is 40 percent, what is XYZ’s

after-tax cost of debt?

##### Problem

3-5: New Project Analysis

XYZ

Inc. needs to install a new manufacturing machine. The base price is $100,000.

Installation costs are $10,000. After 3 years the machine will be sold for

$75,000. Applicable depreciation rates are 33 percent, 45 percent, 15 percent,

and 7 percent. The machine would require a $5,000 increase in net operating

working capital (increased inventory less increased accounts payables). Revenue

would not be affected. Pretax labor costs would decline by $40,000 per year.

The marginal tax rate is 40 percent, and the WACC is 10 percent. Also, the firm

spent $7,000 in feasibility tests.

1.

$7,000 was spent last year. How should this be handled?

2.

For capital budgeting purposes, what is the initial investment

outlay for the machine? That is, what is the Year 0 project cash flow?