Question
Recall that if markets are efficient, all price changes must be exactly justified by changes in fundamental value.Suppose a company makes and sells bottles. The
Recall that if markets are efficient, all price changes must be exactly justified by changes in fundamental value.Suppose a company makes and sells bottles. The company can manufacture a million bottles every year (same number each year) at the cost of $ 6/bottle and sell them at the price of $ 10/bottle. Suppose there is no other cost, no taxes, and bottle prices never change, and that the company can always sell all the bottles it manufactures. Thus, the company makes $ 4 million profits each year. Further assume the company always pay out profits as dividends to shareholders. Suddenly, the company experienced a surprising technology breakthrough which lowered the bottle production cost to $ 2/bottle. Assume this is the only change that happened. When this news was announced, the companys stock price immediately jumped up by 50%. Does the market appear efficient? Why or why not? Make sure to back up your answer with calculations.
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