Question

Consider that there is a weak-form of efficiency in the markets.

A pharmaceutical company announces that it has received Federal Drug Administration approval for a new allergy drug that completely prevents hay fever. The consensus analyst forecast for the company's earnings per share (EPS) is $4.50, but insiders know that, with this new drug, earnings will increase and drive the EPS to $5.00. What will happen when the company releases its next earnings report?
A. There will be some volatility in the stock price when the earnings report is released, but it is difficult to determine the impact on the stock price. However, the prices will eventually adjust to the news announcement.
B. The stock price will not change, because the market already incorporated that information in the stock price when the announcement was made.
C. The stock price will increase and settle at a new equilibrium level.
An analyst who attempts to find undervalued securities by analyzing basic information, such as accounting data, business operations, and future prospects, performs a fundamental analysis

Answer 1

The stock price will experience volatility when the earnings report is released, but it will eventually adjust to the news announcement.

Step-by-step explanation:

The correct answer to the question is A which states that there will be some volatility in the stock price when the earnings report is released, but it is difficult to determine how much will be the impact on the stock price. However, the prices will eventually adjust to the news announcement.

When the pharmaceutical company releases its next earnings report, there will likely be some volatility in the stock price. This is because the announcement of the Federal Drug Administration's approval for the new allergy drug and the increase in earnings per share (EPS) will affect investor expectations. It's difficult to determine the exact impact on the stock price, but eventually, the prices will adjust to reflect the news announcement.

Answer 2

C). The stock price will increase and settle at a new equilibrium level.

Step-by-step explanation:

As per the details provided, 'the next earnings report of the company would display an increase in the stock price and settled onto a new level of equilibrium.' The recommendation and approval from the Federal Drug Administration would assist in establishing the credibility of the company and gain people's trust. Therefore, people will now invest more leading to a steep rise in its share price and eventually, leading the company to end up with a good profit. This is why the equilibrium would shift and settle to a greater level. Thus, option C is the correct answer.