FINS1613 Lecture Notes - Lecture 12: Free Cash Flow, Efficient-Market Hypothesis, Cash Flow
Document Summary
A firm with positive free cash flows must decided whether to retain the cash flows or distribute them to investors: Investors ultimately would like the rm to make the decision that best increases the value of their investment. Consider two rms that are trying to decide if they should pay cash to investors or reinvest in new projects. Assume all positive cash ows begin at t=1. Public, easily interpretable information: known to all investors who can determine how the information affects cash flows and discount rates, should be reflected in security prices due to security trading and the forces of supply and demand. Private or difficult to interpret information: examples include news reports, financial statements, press reports, etc Investors may be able to use private information to trade profitably. However, trading will cause prices to shift until the information is reflected in security prices: difficult to interpret information may slowly enter security prices allowing temporary profitable trading opportunities.
