QUESTION 1:"If markets are informationally efficient then financial statement analysis is a waste of time.” Discuss this view in the light of theories and evidence of which you are aware concerning the informational efficiency of capital markets.

Introduction
Capital markets are governed by fair prices and efficiency. Investors want to make sure that they are paying fair prices for the securities they purchase (Head 2003). Fair prices mean the security prices that are acceptable and agreed upon by everyone in the market. Efficiency on the other hand means the capital market's ability "to process relevant information as quickly and accurately" as possible. Information could pertain to the security prices, the company's financial statements, and the interest rates or sales information of the company. When we refer to efficient market we are referring to how the market provides accurate information at a low cost and how it affects fair prices (Head 2003).

Discussion
Market efficiency in the above context refers to the pricing efficiency. When capital markets exhibit pricing efficiency, the security price movements whether denoting abnormal gains or different kinds of information must be accurate for the investor to make effective decision pertaining to the share prices. Inefficiency in such a market would lead to wrong decisions and hence resulting in financial losses. As far as the statement "If markets are informationally efficient then financial statement analysis are a waste of time" is concerned, this statement is untrue. This is because much of the information comes from the company itself such as sales figures, income, assets and shareholder's equity. As the prices in the market changes, the financial status of the company changes accordingly. For this reason even if the fair prices prevalent in the market are efficient, the internal information must be attained by the investors to calculate, evaluate, analyze and make effective purchasing decisions. Hence, in this context pricing efficiency is not enough for financial statement analysis. One needs to have internal information to be able to come to the right conclusion.

Boot and Thakor (1997) in their study indicate that informational efficiency of security prices is the key to effective decision making. They are of the opinion that the amount of information revealed by the firm reflects the effectiveness of operating decisions. The informational efficiency of a firm therefore depends on the firm's operating information as well as capital structure status. The cost of disseminating information is born by the firm's internal cash to be returned as premium to the buyers for selling the information to the traders. Empirical evidence also indicate that the "firm's security returns is a sizable component of its cost of capital" (qt. Chang and Yu 2003). To resolve cost of capital, the firm and the market rely on the fair prices to adjust the liquidity within the cost of capital. When buyers make decision as to the efficiency of the market, they are thus on the lookout for fair prices that separate/integrate the informational efficiency price in the security prices. That is to say, they gauge how high or how low is the cost of the information for making effective purchasing decisions.

Conclusion
From the above discussion, one can conclude that informational efficiency is complementary to financial analysis as it allows the investors to decide whether to buy or sell the securities. This decision is reliant on the informational efficiency on the capital structure and the operating efficiency within the firm. When we refer to the informational efficiency therefore we are referring to the efficient cost of information and how it affects the fair prices prevalent in the market.