Question

1. At the time a management group of RJR Nabisco initially considered engaging in a leveraged buyout, RJRs stock price was less than $70 per share. Ultimately, RJR was acquired by the firm Kohlberg Kravis Roberts for about $108 per share. Does the large discrepancy between the stock price before an acquistion was considered and after the acqusition mean that RJRs price was initially undervalued? If so, does this imply that the market was inefficient?

21. Consider the prevailing conditions that could affect the demand for stocks, including inflation, the economy, the budget deficit, the Feds monetary policy, political conditions, and the general mood of investors. Based on these conditions, do you think stock prices will increase or decrease during this semester? Offer some logic to support your answer. Which factor will have the biggest impact on stock prices?

Answer 1

(1). According to the information given above in the case of Leveraged Buyouts of RJR Nabisco, it is seen that the price of the RJR's stock was initially below $70 per share and the acquisition of the RJR by the firm Kohlberg Kravis Roberts was for about $108 per share. This shows that the price of the RJR was undervalued and when all the relevant information was available to the market the price of the stock went up.

According to the efficient market hypothesis (EMH) in an efficient market stock prices accurately reflects assets true value. In an effcient market all informations are available to the investor for a publicly traded stock reflects a stocks true value, but in an inefficient market it doesnot reflects all the informations.

If we read the case given above it shows that the market was inefficient at the time of valuation hence the price of the stock is not the true value of the assets of the RJR company, but at the time of the buyout market was efficient and the true value was reflected in the stock price of the RJR company.