(a) Briefly outline the major functions performed by the capital market and explain the…

(a) Briefly outline the major functions performed by the capital market and explain the importance of each function for corporate financial management. How does the existence of a well-functioning capital market assist the financial management function?

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

(c) 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:

1 semi-strong form efficient, and

2 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.