Get premium membership and access questions with answers, video lessons as well as revision papers.
a) The Timing Of Financial Policy
Some financial managers argue that there is a right or wrong time to issue securities i.e. new shares
should only be issued when the market is at the top rather than the bottom. If the market is efficient, however, price follows a trendless random walk and its impossible for managers to know whether
today‘s price is the highest or the lowest. Timing other policies e.g release of financial statements,
announcement of stock splits, etc has no effect on share prices.
b) Project Evaluation Based Upon NPV
When evaluating new projects, financial managers use the required rate of return drawn from
securities traded in the capital market. For example, the rate of return required on a particular project
may be determined by observing the rate of return required by shareholders of firms investing in
projects of similar risk. This assumes that securities are fairly priced for the risks that they carry (i.e.
the market is efficient).
If the market is inefficient, however, financial managers could be appraising projects on a wrong basis
and therefore making bad investment decisions since their estimate on NPV is unreliable.
c) Creative Accounting
In an efficient market, prices are based upon expected future cash flow and therefore they reflect all
current information. There is no point therefore in firms attempting to distort current information to
their advantage since investors will quickly see through such attempts. Studies have been done for
example to show that changes from straight-line depreciation to reducing balance method, although it
may result to increasing profit, may have no long-term effect on share prices. This is because the
company‘s cash flows remain the same. Other studies support the conclusion that investors cannot
be fooled by manipulation of accounting profit figure or charges in capital structure of company.
Eventually, the investors will know the cash flow consequences and alter the share prices
consequently.
d) Mergers and Takeovers
If shares are correctly priced then the purchase of a share is a zero NPV transaction. If this is true
then, the rationale behind mergers and takeovers may be questioned. If companies are acquired at
their correct equity position then purchasers are breaking even. If they have to make significant gains
on the acquisition, then they have to rely on synergy in economies of scale to provide the saving. If
the acquirer (or the predator) pays the current equity value plus a premium, then this may be a
negative NPV decision unless the market is not fully efficient and therefore prices are not fair.
e) Validity of the current market price
If markets are efficient then they reflect all known information in existing share prices and investors
therefore know that if they purchase a security at the current market price they are receiving a fair
return and risk combination. This means that under or over valued shares or market securities do not
exist. Companies shouldn‘t offer substantial discounts on security issues because investors would not
need extra incentives to purchase the securities.
Judiesiz answered the question on August 16, 2018 at 21:29
- What should be included in the audit control file?(Solved)
What should be included in the audit control file?
Date posted: August 16, 2018. Answers (1)
- How are the aims systems development controls achieved?(Solved)
How are the aims systems development controls achieved?
Date posted: August 16, 2018. Answers (1)
- In order to be able ultimately to place reliance on the work of the internal auditor, what should the external auditor do?(Solved)
In order to be able ultimately to place reliance on the work of the internal auditor, what should the external auditor do?
Date posted: August 16, 2018. Answers (1)
- Outline the factors that are depended upon by extent of reliance in auditing.(Solved)
Outline the factors that are depended upon by extent of reliance in auditing.
Date posted: August 16, 2018. Answers (1)
- Discuss the ways an auditor record the system that he has ascertained.(Solved)
Discuss the ways an auditor record the system that he has ascertained.
Date posted: August 16, 2018. Answers (1)
- Outline the advantages of the imprest system as a system to maintain for cash payments.(Solved)
Outline the advantages of the imprest system as a system to maintain for cash payments.
Date posted: August 16, 2018. Answers (1)
- Which are traditional classifications of operation for internal control purposes?(Solved)
Which are traditional classifications of operation for internal control purposes?
Date posted: August 16, 2018. Answers (1)
- Which are traditional classifications of operation for internal control purposes?
(Solved)
Which are traditional classifications of operation for internal control purposes?
Date posted: August 15, 2018. Answers (1)
-
Discuss various types of internal control in auditing.(Solved)
Discuss various types of internal control in auditing.
Date posted: August 15, 2018. Answers (1)
- What are the responsibilities of a project manager?(Solved)
What are the responsibilities of a project manager?
Date posted: August 7, 2018. Answers (1)
- Outline the characteristics of project management process(Solved)
Outline the characteristics of project management process.
Date posted: August 7, 2018. Answers (1)
- A researcher undertook a study to show how social background influences academic achievement. He considered a population of 600 people whose composition was; 90 professionals,...(Solved)
A researcher undertook a study to show how social background influences academic achievement. He considered a population of 600 people whose composition was; 90 professionals, 115 managers, 150 skilled workers, 120 unskilled workers and 125 businessmen.
REQUIRED
What would be the most suitable sampling method for the study and why? (3mks)
Date posted: July 18, 2018. Answers (1)
- Outline five advantages of innovation in Kenya's banking sector(Solved)
Outline five advantages of innovation in Kenya's banking sector.
Date posted: July 12, 2018. Answers (1)
- Outline the limitations of deficit financing.
(Solved)
Outline the limitations of deficit financing.
Date posted: July 10, 2018. Answers (1)
- Outline the objectives of fiscal policy in developing countries.
(Solved)
Outline the objectives of fiscal policy in developing countries.
Date posted: July 10, 2018. Answers (1)
- Outline the rules of functional finance(Solved)
Outline the rules of functional finance
Date posted: July 10, 2018. Answers (1)
- What are the likely consequences of public deficit?(Solved)
What are the likely consequences of public deficit?
Date posted: July 10, 2018. Answers (1)
- Outline the objectives of the budget.(Solved)
Outline the objectives of the budget.
Date posted: July 10, 2018. Answers (1)
-
What are the features of a budget?(Solved)
What are the features of a budget?
Date posted: July 10, 2018. Answers (1)
- Explain the methods of repayment of debt.
(Solved)
Explain the methods of repayment of debt.
Date posted: July 10, 2018. Answers (1)