1. Which of the following observations appear to indicate market inefficiency? For each case, explain whether the inefficiency is weak, semi-strong, or strong and explain why briefly. (Note: If the market is not weak-form-efficient, it is said to be weak-form-inefficient; if it is not semi-strong-form efficient, it is semi-strong-form-inefficient; and so on) a. Managers make superior returns on their purchases of their company's stock. b. There is a positive relationship between the return on the market in one quarter and the change in aggregate corporate profits in the next quarter. c. There is disputed evidence that stocks which have appreciated unusually in the recent past continue to do so in the future. d. Stocks of companies with unexpectedly high earnings appear to offer high returns for several months after the earnings announcement. e. The market price of a stock moves or fluctuates. f. A lawyer works for a firm that advises corporate firms planning to sue other corporations for antitrust damages. He finds that he can "beat the market" by short-selling the stock of the firm that will be sued. g. Firms with unexpectedly high earnings earn abnormally high returns for several months after the announcement. 2. World Cellfone Co. is considering the purchase of a new telecommunications system for $60 million. This system will boost the firm's productivity so that its operating earnings will increase by $12 million per year over the next 8 years. World Cellfone Co. corporate tax rate is 35% and its debt and equity costs are 7% and 14%, respectively. The manufacturer of the telecommunications system is willing to loan the firm $25 million for the purchase at a subsidized rate of 5% (with World Cellfone Co. putting up the remainder from its retained earnings account). The loan principal is to be paid off in 5 equal installments over 5 years with interest being paid every year on the loan outstanding. If the firm's required rate of return under all-equity financing is 10%, should it go ahead with the purchase?