Question

1. A firm trading on the New York Stock Exchange just posted extraordinary earnings (income) after its controller implemented a new method of depreciation. Its stock price does not increase at all. Which principle of finance best explains this phenomenon?

2. Martha plans to graduate as a nurse next year and has begun planning her future with her financial planner. she forecasts her annual income to be 50,000 a year for the next 20 years, and plans to spend approximately 38,000 annually. After working hard during those years and completing her MBA, she plans to significantly increase her annual income in the subsequent 20 years. She expects to earn 90,000 a year in her managerial role. the financial planner informs her the the real risk-free interest rate over the next forty years is expected to be 5% annually.

a. Use the lifetime budget constraint to determine her maximum annual expenditures beginning in twenty years?

b. How is the answer in part (a) if the interest rate is 10%?

c. How does your answer change if she reduces her spending in the first 20 years to 30,000?

d. What is the opportunity cost of the annual $8,000 of additional expenditures in part (a)?

Answer 1

1. The theory which suggests the situation is Efficient Market Hypothesie: Is an investment theory whereby share prices reflect all information and consistent alpha generation is impossible. Theoretically, neither technical nor fundamental analysis can produce risk-adjusted excess returns, or alpha, consistently and only inside information can result in outsized risk-adjusted returns.

2.a,b,c,d