Inancing Decisions and Market Efficiency

This Coursework is for Corporate Finance and relates to the topic of Financing Decision & Market Efficiency Theory/IPOs

The instructions for the coursework are that person B explains to person A the following concept:

A: I ve just heard Moody s is going to downgrade our bonds. What do we do?

B: Nothing.

A: Nothing? But the price will drop like a stone when the rating change is announced.

B: No it won t. The market already knows we ve been doing badly. Our bond and stock prices have been dropping for the last year. The rating change just reflects the bond s higher risk.

A: But if a rating change doesn t affect the bond s price, why did we bother to pay for the rating in the first place?

B:Because having a rating lowered our interest costs when we issued the bonds. The important point is not what rating you have, but whether or not you have a rating.

A: Wait, you are saying that our rating doesn t matter& and yet it does matter?

B:Let me try to explain&
Please use whatever references are required for this coursework.