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Company C is a quoted fashion retailer. Davis believes that current share price of $2.58 undervalues the company significantly making it a suitable target. He is also interested in company C as he feels it would have a good fit with his existing funds portfolio and would diversify away some risks.
Which one of the following statements concerning David’s opinion that company C is undervalued is true?
a. David believes that stock market is semi-strong form efficient and he has access to secret inside information
b. David believes that the stock market is strong form efficient and he has access to secret inside information.
c. David believes that the stock market is strong form efficient and he has analyzed financial statements and press releases to form his opinion.
d. David believes that the stock market is weak form efficient and he has analyzed financial statements and press releases to form his releases to form his opinion
The answer is A. pls explain to me why A is the answer.
Share prices are based on shareholders expectations which depend on the amount of information they have about the companies plans.
If the market was strong form efficient then all shareholders would have the same information as Davis and so the price would already have taken this into account.
If it is semi-strong, then other shareholders only have access to information that has been made public and so the share price will not currently be reflecting the secret information that Davis has. So it will currently be under-valued (and when the secret information does eventually become public, then the share price will increase).
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