Suppose the price was 2.35 what should somebody who owns the stock do? The owner should clearly sell since this gives 2. 35 whereas if the stock was held onto it would pay off 2.29 in terms of today's money. If everybody who owns the stock tries to sell the price will fall until it is equal to 2.29 Whenever prices get out of line with discounted cash flows there will be profit opportunities. The efficient markets hypothesis is essentially arguing these can't last for long. In other words arbitrage ensures that prices reflect discounted cash flows If stock market prices reflect discounted cash flows then this implies the following Implication of Efficient Markets Hypothesis la positive NPV project is accepted the value of the firm will increase by the amount of the project's NPk Hence accepting positive NPv projects leads to an increase in stock price and the creation of shareholder wealth. Rejecting negative NPV projects avoids a fall in share price and the destruction of shareholder wealth This fundamental view of the stock market is at the heart of most corporate finance theories. An alternative view is a technical perspective. What is this? One of the activities that some market analysts, known as technical analysts, undertake is to plot the movement of stock prices against time and try to predict future cycles 33 Suppose the price was 2.35 what should somebody who owns the stock do? The owner should clearly sell since this gives 2.35 whereas if the stock was held onto it would pay off 2.29 in terms of today's money. If everybody who owns the stock tries to sell the price will fall until it is equal to 2.29. Whenever prices get out of line with discounted cash flows there will be profit opportunities. The efficient markets hypothesis is essentially arguing these can't last for long. In other words arbitrage ensures that prices reflect discounted cash flows. If stock market prices reflect discounted cash flows then this implies the following. Implication of Efficient Markets Hypothesis: If a positive NPV project is accepted the value of the firm will increase by the amount of the project's NPV. Hence accepting positive NPV projects leads to an increase in stock price and the creation of shareholder wealth. Rejecting negative NPV projects avoids a fall in share price and the destruction of shareholder wealth. This fundamental view of the stock market is at the heart of most corporate finance theories. An alternative view is a technical perspective. What is this? One of the activities that some market analysts, known as technical analysts, undertake is to plot the movement of stock prices against time and try to predict future cycles