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Evidence against market efficiency

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Reference no: EM132757969

You have the following information for Alpha plc:

Equity: 500,000 shares. The company just paid a dividend of £2 and the dividends are expected to grow by 3% per year indefinitely. The current share price is £20. The return of Alpha's equity has a standard deviation of 24% per annum and a correlation with the market of 0.9.

Debt: 10,000 bonds outstanding, with 20 years to maturity, a coupon rate of 7% and a face value of £1,000. The price of the bonds is £901.036 and they pay coupons semiannually.

The market risk premium is 6% and the standard deviation of the returns of the market is 15%. Treasury bills are yielding 4% and the corporate tax rate is 20%.

Delta plc announced this morning that its profit from last quarter has dropped 15% compared to the previous quarter. The closing price of the company at the end of the day is up 5% from yesterday. Is this evidence against market efficiency? Explain.

Reference no: EM132757969

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