1. (a) If a corporation announces that it expects quarterly earnings to increase by 22 percent and it sees an increase of 25 percent, what should happen to the price of the corporation's stock if the efficient markets hypothesis holds, everything else held constant?

(b) Your best friend calls and gives you the latest stock market "hot tip" that he heard at the health club. Should you act on this information? Why or why not?

2. (a) If the U.S. federal government raises the income tax rates, would this have any impact on a state government's bonds? Please explain your answer.