Reference no: EM131352654

It consists of two questions, both of those questions must be attempted. Students are advised to concentrate on the following forquestions:

- Introduction (definitions must be given if relevant),
- Content,
- Expression,
- Presentation,
- Conclusion, and
- Reference List.

Note:

- The above items are attributes of a good assignment - they are not necessarily sections.
- Work that fails to show adequate acknowledgement of sources will not receive a mark.
- Essays must have academic references in the reference list and the referencing must follow good academic format. Students are strongly urged to read reviewed academic journal articles.

- The link to the library website for more information is:

https://www.federation.edu.au/library/assignment-and-research-help/referencing

- Penalty for late submissions: 10 percent of your earned marks will be deducted for each day after the due date, unless prior arrangements are made with the lecturer and are consistent with the School rules and practices.

- A high level of scrutiny will be conducted to detect plagiarism. Students are strongly advised to use Turnitin.

Total mark will be converted to out of 25.

Q1. Word limit 850 words +/-100 (5 + 45=50 marks)

Q1.a) Describe the three forms of the efficient-market hypothesis?

Q1.b) The following section is taken from: Solomon, D.H. (2012), ‘Selective Publicity and Stock Prices'The Journal of Finance, VOL. LXVII, No. 2, April, pp. 631.

"In this paper, I provide evidence that media coverage affects the price responseto news announcements. Greater coverage of positive news stories raisesinvestor expectations of future profitability, leading to price increases in theshort term and lower returns in the future around earnings announcements.

My findings suggest that investors rely on the media to help them processinformation and decide which stories are economically important. With theproliferation of free online news services, the problem becomes deciding whichpress releases and articles to read in the limited time available. Media coveragecan help here by carrying an imprimatur of importance for a story. Greatercoverage of good news relative to bad news is thus interpreted as indicatingthat the good news is more economically significant.

The evidence in this paper also indicates that reporters and newspapersare not unbiased in their decisions about which stories to cover. Instead, theyare susceptible to influence by IR firms, who are able to increase the chancesof particular stories being covered. Moreover, this influence appears to operatethrough the channel of personal connections between reporters and IRfirms. How exactly such incentives operate is an area that invites furtherresearch.

News coverage is also an avenue by which some managers attempt to influenceinvestor opinion. As a form of investor manipulation, it is quite attractive.

It is fairly low cost-the average client of an IR firm spends only around $474,000 per year on IR firm services [...].It is difficult to prove that a particularnewspaper report was due to IR firm influence, and the practice does not involvemanagers making any false or misleading statements. The association between IR firm use and management of reported earnings, such as earnings restatementsand cuts to R&D expenditure as well as weak shareholder protection,suggests that manager myopia might partly explain IR firm use. Nonetheless,it is possible that firms obtain other benefits from the publicity that are notmeasured in stock returns (such as greater product recognition as part of amarketing effort). Given the low cost of IR firms, it is not possible to reject thehypothesis that IR firms pay for themselves or even add value, but not enough to be visible in overall stock returns"

Critically examine and comment on the above section in light of efficient market hypothesis.

Note: Students are strongly advised to read: Solomon, D.H. (2012), ‘Selective Publicity and Stock Prices'The Journal of Finance, VOL. LXVII, No. 2, April, pp. 599 - 637 (available on Moodle).In addition to this, students are strongly urged to read reviewed journal articles(minimum of two extra articles are required). Please note: understanding the notions in the articles is more important than an entanglement with the advance math in many of the articles.

Q2 ABC Motors Ltd. is a listed company with significant dealings in imports and exports. Given their plans for a new $8,000,000 project, the Chief Financial Officer (CFO)'s main task is to prepare a document to the Board to discuss the best way of funding the project. The CFO is considering several options: a long-term debt, debenture issues, new share issue, or a combination thereof. After considering the current domestic and global economic conditions and the statement below by the Australian Reserve Bank Governor, please provide advice to the CFO as to which of the (above) listed options is optimal (NB: justify the option you choose).

The quotation below is taken from The Australian (2016), November 2 page 27.

"Statement by RBA Governor Phillip Lowe: Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

The global economy is continuing to grow, at a lower than average pace. Labour market conditions in the advanced economies have improved over the past year, but growth in global industrial production and trade remains subdued. Economic conditions in China have steadied recently, supported by growth in infrastructure and property construction, although medium-term risks to growth remain. Inflation remains below most central banks' targets.

Commodity prices have risen over recent months, following the very substantial declines over the past few years. The higher commodity prices have supported a rise in Australia's terms of trade, although they remain much lower than they have been in recent years.

Financial markets are functioning effectively. Funding costs for high-quality borrowers remain low and, globally, monetary policy remains remarkably accommodative. Government bond yields have risen, but are still low by historical standards.

In Australia, the economy is growing at a moderate rate. The large decline in mining investment is being offset by growth in other areas, including residential construction, public demand and exports. Household consumption has been growing at a reasonable pace, but appears to have slowed a little recently. Measures of household and business sentiment remain above average.

Labour market indicators continue to be somewhat mixed. The unemployment rate has declined this year, although there is considerable variation in employment growth across the country. Part-time employment has been growing strongly, but employment growth overall has slowed. The forward-looking indicators point to continued expansion in employment in the near term.

Inflation remains quite low. The September quarter inflation data were broadly as expected, with underlying inflation continuing to run at around 1½ per cent. Subdued growth in labour costs and very low cost pressures elsewhere in the world mean that inflation is expected to remain low for some time.

Low interest rates have been supporting domestic demand and the lower exchange rate since 2013 has been helping the traded sector. Financial institutions are in a position to lend for worthwhile purposes. These factors are assisting the economy to make the necessary adjustments, though an appreciating exchange rate could complicate this.

The Bank's forecasts for output growth and inflation are little changed from those of three months ago. Over the next year, the economy is forecast to grow at close to its potential rate, before gradually strengthening. Inflation is expected to pick up gradually over the next two years.

In the housing market, supervisory measures have strengthened lending standards and some lenders are taking a more cautious attitude to lending in certain segments. Turnover in the housing market and growth in lending for housing have slowed over the past year. The rate of increase in housing prices is also lower than it was a year ago, although prices in some markets have been rising briskly over the past few months. Considerable supply of apartments is scheduled to come on stream over the next couple of years, particularly in the eastern capital cities. Growth in rents is the slowest for some decades.

Taking account of the available information, and having eased monetary policy at its May and August meetings, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time."