Corporate Finance

Corporate Finance

Introduction

The paper aims at evaluating the Efficient Marketing Hypothesis, concept of investing in bonds, DDM model, Equity and WACC. The paper determines and analyzes selling price of the selected bond. In addition to this, the paper identifies various factors that may affect a bond's value. Finally, the paper draws conclusion on the developed understanding of investing in bonds.

Part I. Capital Markets

Efficient Market Hypothesis

It is an investment theory that says that it is not possible to beat the market as the efficiency of the stock market causes the current prices of the shares to always include and provide a reflection of all the information that is relevant. According to the Efficient Market Hypothesis, stocks are always traded on their fair value on their stock exchanges, and it makes it impossible for the investors to purchase the stocks that undervalued or sell the stocks that have inflated prices.

Importance of Efficient Market Hypothesis

The Efficient Market hypothesis has a significant importance that has stemmed from the implications of empirical studies that have been tested over the period of time. A number of researches have been conducted that focused on the RWH (Random Walk Hypothesis) and the model of martingale. These are the two descriptions of statistics that were incorporated in the EMH implications for the price changes that could not be forecasted. The first test of RWH was carried out by Cowles and Jones (1937), who made a comparison between the frequency of reversals and sequences in the historic returns on stocks, in which the previous returns are a pair of consecutive returns with the same sign and the later pairs are the consecutive returns have opposite signs.

Fama and Blume (1966), carried out a research in which they carried out tests for RWH using the historic data for stock prices. Later, Lo and MacKinlay (1988) studied the fact that the scale for variances of returns is linearly under RWH. Particularly, the variances were found to grow faster in comparison to the increase in the holding period, implying a positive correlation of the series in the weekly returns.

French and Roll (1986) studied the stock variances over the weekends and the exchange holidays that are considerably lower in comparison to the variance returns over the same time period when the markets are open. These differences suggested that the act of trading creates volatility that might have a symptom of the noise traders. For the periods of holding that last longer than a week, for instance, for three to five years Fama and French (1988) found a negative correlation in the series of the stock returns in the United States by using data from the year 1926 to 1986. Although, the estimates for the coefficients of correlation seem to be large in magnitude, there is insufficient data that rejects the RWH at significance levels. Additionally, there are a number of statistical artefacts that document the doubt on the reliability of the longer horizon inference.

Efficiency of the Capital markets

The literature of ...