Question

Applying the Efficient Market Hypothesis (EMH) to capital budgeting, which of the following statements is correct?   

a. In an efficient market the NPV for projects should on average be positive.

b. Existing large firms can be considered evidence that the EMH is true.

c. Existing large firms may exist because they may not have played the game long enough meaning they may still go insolvent.

d. Firms can be considered to be a collection of projects; and existing firms a collection of negative
NPV projects.

e. If firms produce new information or technology, this could never be a reason for a firm to produce a NPV.

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If a firm’s equity is considered a call option, then

a. The firm can never go bankrupt.

b. Volatility will make a firm’s equity more valuable.

c. A firm can only have positive outcomes.

d. a firm can never issue debt.

e. a firm’s value will only increase with more debt.

Answer 1

1. If the firm is producing new information or newer technology then this could never be the reason for firm to produce the net present value because all these newer technology and information have been discounted into the outcome.these newer information and your technology are part of privately a valuable information and they have been discounted already

Correct answer will be option (e).

2.(e)the value of the firm will only increase with more debt.