On October 21, 2004, Abitibi-Consolidated Inc., a large Canadian-based newsprint and groundwood producer, reported income from continuing operations for its third quarter, 2004, of $182 million, or $0.41 per share. This compares with a net loss from continuing operations for the same quarter of 2003 of $70 million, or $0.16 per share. Sales for the quarter were $1,528 million, and core earnings (ie., excluding unusual and non-recurring items) were $82 million. The analyst forecast for the third quarter, 2004, was a loss of $0.06 per share Income from continuing operations included unusual and non-recurring items of $239 million, being a gain of $2.39 million from foreign exchange conversion. Much of the company's long-term debt is denominated in U.S. dollars. The foreign exchange gain. arose because of the rising value of the Canadian dollar, relative to the U.S. dollar, during the quarter.

Comparable figures for the third quarter of 2003 were: sales of $1,340 million, a core loss of $32 million, and foreign exchange conversion gain of $13 million.

There is no mention of R&D costs in the company's third quarter report. Its 2003 annual report mentions R&D only in passing, with reference to forest conservation. Presumably, R&D expenditures are relatively low.

Abitibi-Consolidated's share price rose $0.59 to $7.29 on the Toronto Stock Exchange. on October 21, 2004. The S&P/TSX index gained 59 points to close at 8,847 on the same day According to media reports, the increases were driven by a "red-hot" materials and energy sector (including Abitibi-Consolidated). In a conference call accompanying its third quarter report, Abitibi-Consolidated's CEO complained that investors were too pessimistic about the company. The company's beta, according to Yahool Finance, is 0.779, The risk- free interest rate at this time was approximately 0.00020 per day. Note the theoretical relationship a 

Required

a. Evaluate (in words only) the persistence of Abitibi-Consolidated's operating income for the third quarter of 2004

b. The company reported no extraordinary items in its third quarter report. Do you feel that the foreign exchange gain of $239 million should have been reported as extraor dinary, rather than included in income from continuing operations? Explain why or why not

c. Do you feel that the increase in Abitibi-Consolidated's share price on October 21 was consistent with efficient securities market theory or do you agree with the CEO? Explain, and show any calculations.

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R - = R+ (1 - B). (1-B).