Implication of efficiency market theory for financial policy

Assignment Help Financial Management

Reference no: EM13688105

Question 1:

Prices of Calls and Puts Options the shares of Marks & Spencer

Share Price	Exercise Price	Calls			Puts
		Sep	Oct	Nov	Sep	Oct	Nov
210	205	12.0	24.0	27.0	6.0	17.5	19.5
	210	9.5	21.5	24.5	8.5	20.0	22.0

a) Explain why the November calls are trading at higher prices than the September calls.

b) Draw a diagram illustrating a straddle, using calls and puts expiring in November and an exercise price of 205. Explain the circumstances in which an investor might consider it worthwhile to invest in a straddle.

c) Develop a covered call using the data provided and comment on the nature of the payoffs produced and the potential uses of the strategy.

Question 2:

i. Explain the three different forms of the efficient markets hypothesis.

ii. Discuss some of the implications of efficiency market theory for corporate financial policy.

Question 3:

Following the analysis developed by Modigliani and Miller it is generally accepted that the capital structure of companies have no affect on their market value when capital markets are perfectly competitive.

But financial managers appear to give considerable importance to capital structure. Discuss some of the reasons why managers might be concerned about decisions relating to capital structure.

Reference no: EM13688105

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