1. Consider why a dealing rule like Always buy in early December should be doomed to failure. This rule is designed to exploit the so-called end-of-year effect claiming that share prices always rise at the end of the year.

2. Share prices of takeover targets invariably rise before the formal announcement of a takeover bid. What does this suggest for the EMH?

3. If the stock market is efficient, can no one beat the market average return?

4. Describe the efficient markets hypothesis and explain the differences between the three forms of the hypothesis which have been distinguished.

5. Company A has 2 million shares in issue and company B 6 million. On day 1 the market value per share is 2 for A and 3 for B. On day 2, the management of B decides, at a private meeting, to make a cash takeover bid for A at a price of 3.00 per share. The takeover will produce large operating savings with a value of 3.2 million. On day 4, B publicly announces an unconditional offer to purchase all shares of A at a price of 3.00 per share with settlement on day 15. Details of the large savings are not announced and are not public knowledge. On day 10, B announces details of the savings which will be derived from the takeover.

Required:

Ignoring tax and the time-value of money between days 1 and 15, and assuming the details given are the only factors having an impact on the share prices of A and B, determine the day 2, day 4 and day 10 share prices of A and B if the market is:

i. semi-strong form efficient, and

ii. strong form efficient

in each of the following separate circumstances:

(i) the purchase consideration is cash as specified above, and

(ii) the purchase consideration, decided upon on day 2 and publicly announced on day 4, is one newly issued share of B for each share of A.