(a) Company A has 6 million shares in issue and Company B 20 million. On day 1 the market value per share is £6 for A and £10 for B. On day 2, the management of B decides, at a private meeting, to make cash takeover bid for A at a price of £10 per share. The takeover will produce large operating savings with a value of £40 million. On day 5, B publicly announces an unconditional offer to purchase all shares of A at a price of

£10.00 per share with settlement on day 20. Details of the large savings are not announced and are not public knowledge. On day 15, 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 20, 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 5, and day 15 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 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 5, is one newly issued share of B for each share of A.

(b). The Efficient Market Hypothesis states that “security prices fully reflect all available information” (Fama, 1991).

Required:

Critically evaluate the previous statement, ensuring the response is supported with relevant empirical evidence.

In this section students should demonstrate an understanding and knowledge of the theoretical aspects that underpin the differing strengths of market efficiency. The discussion / evaluation should be supported with relevant, contemporary, academic research that has been undertaken within this field and should be referenced accordingly. Ensure the response does not become overly descriptive within its approach, rather, attempt to incorporate a critical viewpoint throughout, allowing logical conclusions to be offered.