Question

When the SEC approves a stock issue, it does not provide an opinion about the value of the stock. Do you think the SEC should give an opinion to investors on the appropriate value of the stock being issued? Explain. If Samantha invests $700 today in an account that pays 4% interest compounded annually, how much will she have in her account four years from today? Fifteen(15) years ago, your parents purchased an investment for $2,500. If the investment earned 6% interest each year, how much is it worth today? What does it mean for a financial market to be considered (a) informationally efficient and (b) economically efficient?

Answer 1

It is correct that when the SEC approves a stock issue it does not provide an opinion about the value of the stock. It is not appropriate to expect the regulator to determine an asset value for investment purpose. The Regulator is in the market to protect the Interest of everyone and maintain an environment where business can be done in a fair and impartial manner. The role of SEC in approving a stock issue is to make sure that the IPO is not being done to manipulate the investors and if the IPO is unsuccessful then the money is being returned to the investors and the company meets the criteria for the IPO. SEC is a regulator and expecting it to provide a fair value of IPO stock will not be right thing from the regulatory point of view as well as business point of view. It is the duty of the Investor to evaluate the Investment option and decide accordingly.

Samantha Invests 700 today Interest rate = 4% compounded annually The value four years from today will be 700*(1.04)^4 818.901

The Investment was purchased 15 years ago for $2500 Investment earned = 6% Assuming the Interest is being compounded annually 2500*(1+0.06)^15 5991.40

a) When we say the market is informationally efficient that means that everybody has access to the same information and the price reflects that information. When the market is informationally efficient the price of the asset is adjusted very quickly and benefiting from that information becomes slightly difficult thing to do. b) When the markets are economically efficient then the allocation of resources in the market is optimal and efficient. The asset is allocated to most optimum user. Also, when the market is economically efficient then the transaction cost in that market is very low. In an economically efficient market, the assets are allocated to their best use at lowest cost.