CMA Final · Strategic Financial Management · Efficient Market Hypothesis
The share price of Narmada Foods Ltd. is Rs 200 before an announcement. Investors expected a dividend increase that would raise value by Rs 10 per share, but the company announced a dividend increase worth Rs 25 per share in value. If the market is semi-strong efficient, what is the new price immediately after the announcement, assuming the Rs 200 price already included the expected news?
The new price is Rs 215. In a semi-strong efficient market the expected Rs 10 gain is already in the Rs 200 price, so only the Rs 15 surprise (Rs 25 less Rs 10) is added on announcement.
- ARs 225
- BRs 215Correct
- CRs 210
- DRs 200
Explanation
The Rs 200 price already includes the expected Rs 10 gain. Only the surprise is new: 25 - 10 = Rs 15. New price = 200 + 15 = Rs 215. Rs 225 ignores that the expectation was priced in, and Rs 200 ignores the surprise.
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