B. The efficient markets hypothesis The concent of market efficiency underpins almost all finandal theory and decision models. When finandial markets are efficient, the price of a security -5uch as a share of a particulat corporation's common stock-should be: the present value estimiate of the firm's expected cash flows discounted by its appropriate rate of return (also called the intrinsic value of the stock). Amost all financial theory and dedsion models assume that the financial markets are efficient, The informational eficiency of financial markets determines the ability of investorn to "beat" the market and eam excess (or abnormal) fefums on their investments. If the markets are eficient, they will react ranidiy as new relevant information becomes avaltable. Finandal theorists have identified three levels of informational efficiency that reffect what information is incomporated in stock prices. Identify the form of capital market efficiency under the efficient market hypothesis described in the following statement: Current markst sorices reflect all information contained in past price movements. This statement is consistent with: Weak form efficiency Strong form efficiency Semistrong form effidency Condider that there is a weak form of effidency in the markets. A pharmaceutical company announces that it has received federal Drug Administration approval for a new allergy drug that completely prevents hay fever. The consensus analyst forecast for the company's eamings per share (EPS) is $4.50, but insiders know that, with this new drug, eamings will increase and drive the eps to 55.00. What will happen when the company releases its next earnings report? there will be some volatility in the stock price when the earnings report is released, but it is difficult to determine the impact on the stock price. However, the prices will eventually adjust to the news announcement. The stock price will increase and settle at a new equilibrium level. The stock price will not change, because the market atready incorporated that information in the stock orice when the announcement was made