The article "GM to Take Charge of $20.8-Billion here reproduced from The Globe and Mail (February 2, 1993) describes the potential impact of SFAS 106, "Accounting for Postretirement Benefits Other Than Pensions," on General Motors and Ford. For example, it appears that General Motors will be required to record a liability of $20.8 billion, reduc- ing its shareholders' equity from $27.8 billion to $7 billion, about a 75% reduction.

Required

Describe and explain how you would expect the efficient securities market to react to this information.

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Required a. Give three reasons to explain why this could happen. b. Use the Sharpe-Lintner CAPM (Equations 4.2 and 4.3) to explain how the new infor- mation caused the current price slip. Calculations are not required. 6. On February 27, 2007, Laurentian Bank of Canada released results for its first quarter, ending on January 31, 2007. It reported profit of 74 cents per share (70 cents per share before a non-recurring gain). Analysts' estimates of profit for the quarter were 65 cents per share. For the same quarter of the previous year, profit was 59 cents per share. Total revenue increased 6% The bank announced a quarterly dividend of 29 cents per share, unchanged from the two previous quarters. The CFO of Laurentian stated that its loan exposure to struggling forestry and manufacturing firms was better, although there was still room for improvement. Laurentian's shares are traded on the S&P TSX exchange. The TSX index rose 5 points on February 27, closing at 13,040.11 Laurentian's share price fell 34 cents for the day, to $30.71. Required Why did Laurentian's share price fall? Assume efficient securities markets, and consider both economy-wide and firm-specific factors in your answer. 7. Atlas Ltd. is a listed public company. It is in a volatile industry. The market price of its shares is highly sensitive to its earnings. The company's annual meeting is to be held soon, and the president is concerned, expecting to be attacked strongly by a dissident group of shareholders One issue the dissidents are expected to focus on is the company's amortization policy. They will claim that the annual declining-balance amortization charges are excessive- that the company's conservative amortization policy seriously understates annual earnings per share, causing the shares market price to be artificially low. Threats have even been made of suing management and the board of directors to "recover the resulting loss in market value, relative to shareholders in companies with less conservative amortization policies, suffered by Atlas shareholders The president has asked you to help prepare a defence against the expected attack on the company's amortization policy Required Write a memo summarizing how you would recommend the president respond to this attack (CGA-Canada) 8. The article "GM to Take Charge of $20.8-Billion here reproduced from The Globe and Mail (February 2, 1993) describes the potential impact of SFAS 106, "Accounting for Postretirement Benefits Other Than Pensions," on General Motors and Ford. For example, it appears that General Motors will be required to record a liability of $20.8 billion, reduc- ing its shareholders' equity from $27.8 billion to $7 billion, about a 75% reduction.