Magna Jets is a medium sized company that manufactures luxury goods for several well-known chain stores. In
Question:
Magna Jets is a medium sized company that manufactures luxury goods for several well-known chain stores. In real terms, the company has experienced only a small growth in turnover in recent years, but it has managed to maintain a constant, if low, level of reported profits by careful control of costs. It has paid a constant nominal dividend for several years and its director has publicly stated that the primary objective of the company is to increase the wealth of shareholders. The capital structure of BlueSteel is as below £m Overdraft 1·0 10 year fixed interest bank loan 2·0 Share capital and reserves 4·5 ––– 7·5 ––– BlueSteel has the agreement of its existing shareholders to make a new issue of shares on the stock market but has been informed by its bank that current circumstances are unsuitable. The bank has advised that if new shares were to be issued now they would be significantly under-priced by the stock market, causing BlueSteel to issue many more shares than necessary in order to raise the amount of finance it requires. The bank recommends that the company waits for at least six months before issuing new shares, by which time it expects the stock market to have become strong-form efficient.
Required:
3 Discuss the meaning and significance of the different forms of market efficiency (weak, semi-strong and strong) and comment on the recommendation of the bank that BlueSteel waits for six months before issuing new shares on the stock market.
Expert Answer:
Meaning of the Market Efficiency Market efficiency describe the extent to which available informatio... View the full answer
