Capital Market Efficiency Paper


Question Description

Purpose of Assignment

The purpose of this assignment is to allow the student an opportunity to explain what it means to have an efficient capital market. Students will gain an understanding of the different levels of market efficiency and how behavioral finance can inhibit reaching market transparency.

Assignment Steps

Resources: Microsoft® Word

Explain in 525 words what it means to have efficient capital market, including:

  • Describe the behavioral challenges in achieving efficiency.
  • Discuss the three forms of market efficiency.
  • What are the implications to corporate finance?
  • Would you consider the real estate market an efficient capital market? Please explain why or why not.

Effect of Debt Issuance on Stock Valuation

Scenario: Hightower, Inc. plans to announce it will issue $2.0 million of perpetual debt and use the proceeds to repurchase common stock. The bonds will sell at par with a coupon rate of 5%. Hightower, Inc. is currently an all-equity company worth $7.5 million with 400,000 shares of common stock outstanding. After the sale of the bonds, the company will maintain the new capital structure indefinitely. The company currently generates annual pretax earnings of $1.5 million. This level of earnings is expected to remain constant in perpetuity. The tax rate is 35%.

Prepare a at least 100 or more words memo advising the management of Hightower, Inc. on the financial impact, including the following:

  • Discuss the advantages and disadvantages of debt financing over equity financing. This is my portion that i will need to complete

Show all calculations and submit with your memo.

Format your paper consistent with APA guidelines.

Tutor Answer

School: University of Maryland

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Financial Impact of Debt Issuance on Stock Valuation
Author’s Name
Institutional Affiliation


To: Hightower, Inc.
From: Name
CC: Firm’s officials
Date: 15/02/2018
Re: Financial impact of debt issuance on stock valuation
The primary objective of this memo is to advise the management of Hightower, Inc. on
the financial impacts of debt issuance on stock valuation. From my analysis, it is now evident
that that there are advantages of debt financing over equity financing. Some of these advantages
are; lowering the WACC and the company debt and increasing the financial leverage and value
of the company. Its disadvantage is that the riskiness of the company increases and this increases
WACC lowering the cost of the firm.

From the advantages and the disadvantage above, the firm should exercise debt financing
but at a moderate level. Comparing the ad...

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