As of July 2015, 30 countries worldwide are operating 438 nuclear reactors for electricity generation and 67 new nuclear plants are under construction in 15 countries. Nuclear power plants provided 10.9 percent of the world’s electricity production in 2012. In 2014, 13 countries relied on nuclear energy to supply at least one-quarter of their total electricity. As of 2015, there have been three major reactor accidents in the history of civil nuclear power—Three Mile Island, Chernobyl, and Fukushima Daiichi. One was contained without harm to anyone, the next involved an intense fire without provision for containment, and the third severely tested the containment, allowing some release of radioactivity. These are the only major accidents to have occurred in over 15,000 cumulative reactor-years of commercial nuclear power operation in 33 countries. Given a standard of 1 in 10,000 years, use the binomial distribution to compute the probability that there will be three or more “core meltdowns” in 15,000 cumulative reactor-years.21 How does your answer change when the standard is 1 in 10 million?
> Suppose you want to replicate the performance of several stock indexes, some of which are price-weighted, others value-weighted, and still others equally weighted. Describe the investment strategy you need for each of the index types. Are any of the thre
> Another type of index is the geometric index. The calculation of a geometric index is similar to the calculation of a geometric return: 1 + R G = [(1 + R 1 )(1 + R 2 ) . . . (1 + R N )] 1/N The difference in the geometric index construction
> Historically there have been periods where a value-weighted index has a higher return than an equally weighted index and other periods where the opposite has occurred. Why do you suppose this would happen?
> Suppose a share of stock is selling for $100. A put and a call are offered, both with $100 strike prices and nine months to maturity. Intuitively, which do you think is more valuable?
> Escambia Beach Systems is offering 1,000 shares in a Dutch auction IPO. The following bids have been received: How much will Bidder A have to spend to purchase all of the shares that have been allocated to her? Bidder Quantity Price
> In addition to price-weighted and value-weighted indexes, an equally weighted index is one in which the index value is computed from the average rate of return of the stocks comprising the index. Equally weighted indexes are frequently used by financial
> Repeat Problem 14 if a value-weighted index is used. Assume the index is scaled by a factor of 10 million; that is, if the average firm’s market value is $5 billion, the index would be quoted as 500. Data from Problem 14: Suppose the
> In Problem 14, suppose that Douglas McDonnell shareholders approve a 3-for-1 stock split on January 1, 2017. What is the new divisor for the index? Calculate the rate of return on the index for the year ending December 31, 2017, if Douglas McDonnell&acir
> Suppose the following three defense stocks are to be combined into a stock index in January 2016 (perhaps a portfolio manager believes these stocks are an appropriate benchmark for his or her performance): a. Calculate the initial value of the index
> You invested $1,250,000 with a market-neutral hedge fund manager. The fee structure is 2/20, and the fund has a high-water-mark provision. Suppose the first year the fund manager loses 10 percent and the second year she gains 20 percent. What are the man
> You purchased 2,000 shares in the New Pacific Growth Fund on January 2, 2016, at an offering price of $47.10 per share. The front-end load for this fund is 5 percent, and the back-end load for redemptions within one year is 2 percent. The underlying asse
> A sector fund specializing in commercial bank stocks had average daily assets of $3.4 billion during the year. This fund sold $1.25 billion worth of stock during the year, and its turnover ratio was 0.42. How much stock did this mutual fund purchase duri
> In Problem 18, suppose a put option with a $40 strike is also available with a premium of $2.80. Calculate your percentage return for the six-month holding period if the stock price declines to $36 per share. Data from Problem 18: Suppose you have $28,
> In Problem 18, suppose a dividend of $0.80 per share is paid. Comment on how the returns would be affected. Data from Problem 18: Suppose you have $28,000 to invest. You’re considering Miller-Moore Equine Enterprises (MMEE), which is currently selling
> How will personal tax rates impact the choice of a traditional versus a Roth IRA?
> Suppose you have $28,000 to invest. You’re considering Miller-Moore Equine Enterprises (MMEE), which is currently selling for $40 per share. You also notice that a call option with a $40 strike price and six months to maturity is available. The premium i
> You’ve located the following option quote for Eric-Cartman, Inc. (ECI): Two of the premiums shown can’t possibly be correct. Which two? Why? Call Put ECI Stock Price Strike Exp. Vol. Last Vol. Last 20
> In Problem 14, suppose JC Penney stock sells for $8 per share immediately before your options’ expiration. What is the rate of return on your investment? What is your rate of return if the stock sells for $10 per share (think about it)? Assume your holdi
> You believe the stock in Freeze Frame Co. is going to fall, so you short 600 shares at a price of $72. The initial margin is 50 percent. Construct the equity balance sheet for the original trade. Now construct equity balance sheets for a stock price of $
> You just sold short 750 shares of Wetscope, Inc., a fledgling software firm, at $96 per share. You cover your short when the price hits $86.50 per share one year later. If the company paid $0.75 per share in dividends over this period, what is your rate
> Which put contract sells for the lowest price? Which one sells for the highest price? Explain why these respective options trade at such extreme prices.
> If you wanted to purchase the right to sell 2,000 shares of JC Penney stock in November 2015 at a strike price of $9 per share, how much would this cost you?
> Looking back at Problem 12, suppose the call money rate is 5 percent and your broker charges you a spread of 1.25 percent over this rate. You hold the stock for six months and sell at a price of $65 per share. The company paid a dividend of $0.25 per sha
> The 1980s were a good decade for investors in S&P 500 stocks. To find out how good, construct a spreadsheet that calculates the arithmetic average return, variance, and standard deviation for the S&P 500 returns during the 1980s using spreadsheet functio
> You are given the returns for the following three stocks: Calculate the arithmetic return, geometric return, and standard deviation for each stock. Do you notice anything about the relationship between an asset’s arithmetic return,
> Given your answer to the last question and the discussion in the chapter, why would any rational person do anything other than load up on 100 percent small stocks?
> Suppose the call money rate is 4.5 percent, and you pay a spread of 2.5 percent over that. You buy 800 shares of stock at $34 per share. You put up $15,000. One year later, the stock is selling for $48 per share and you close out your position. What is y
> Suppose you purchase 500 shares of stock at $48 per share with an initial cash investment of $8,000. If your broker requires a 30 percent maintenance margin, at what share price will you be subject to a margin call? If you want to keep your position open
> Look back to Figure 1.1 and find the value of $1 invested in each asset class over this 90-year period. Calculate the geometric return for small-company stocks, large-company stocks, long-term government bonds, Treasury bills, and inflation.
> You have found an asset with a 12.60 percent arithmetic average return and a 10.24 percent geometric return. Your observation period is 40 years. What is your best estimate of the return of the asset over the next 5 years? 10 years? 20 years?
> Suppose the call money rate is 5.6 percent, and you pay a spread of 1.2 percent over that. You buy 1,000 shares at $40 per share with an initial margin of 50 percent. One year later, the stock is selling for $45 per share and you close out your position.
> In Problem 13, suppose the call money rate is 5 percent and you are charged a 1.5 percent premium over this rate. Calculate your return on investment for each of the following share prices one year later. Ignore dividends. a. $56 b. $48 c. $32 Suppose in
> Based on the historical record, what is the approximate probability that an investment in small stocks will double in value in a single year? How about triple in a single year?
> Based on the historical record, if you invest in long-term U.S. Treasury bonds, what is the approximate probability that your return will be below −6.3 percent in a given year? What range of returns would you expect to see 95 percent of the time? 99 perc
> Repeat Problems 2 and 3 assuming the initial margin requirement is 70 percent. Does this suggest a relationship between the initial margin and returns Problems 2: You purchase 275 shares of 2nd Chance Co. stock on margin at a price of $53. Your broker
> In Problem 2, suppose you sell the stock at a price of $62. What is your return? What would your return have been had you purchased the stock without margin? What if the stock price is $46 when you sell the stock? Problem 2: You purchase 275 shares of
> What is the distinction between a real asset and a financial asset? What are the two basic types of financial assets, and what does each represent?
> What is the Analees’ return objective? a. 6.67 percent b. 6.17 percent c. 3.83 percent
> Compare the City Center project with specific projects discussed in the chapter, namely: Sony’s Chromatron, Syntex’s Enrprostil, Motorola’s Iridium, Eurotunnel’s Channel Tunnel, Boeing’s Dreamliner, and Airbus’s A380. Your discussion should indicate whet
> Consider whether MGM faced issues in the City Center project that could be characterized as sunk costs, and if so, whether they exhibited behavior consistent with “escalation of commitment.”
> Consider the issues of project budget, scope, and project timetable. Discuss the extent to which the City Center project reflects survey evidence discussed in the chapter about capital budgeting biases associated with the planning fallacy.
> What insights from the discussion of the Morgan Stanley 2003 report on eBay apply to the 2013 report on Aetna by ValuEngine?
> What insights from the discussion of the Morgan Stanley 2003 report on eBay apply to the 2013 report on Aetna by Leerink Swann?
> What insights from the discussion of the Morgan Stanley 2003 report on eBay apply to the 2013 report on Aetna by Cantor Fitzgerald?
> What insights from the discussion of the Morgan Stanley 2003 report on eBay apply to the 2013 report on Aetna by Jefferies?
> How would you use behavioral concepts to explain generally why different analysts arrive at different price targets?
> Identify the psychological phenomena in the minicase. Prioritize the phenomena from most important to least important. Begin your answer by defining the phenomena, and then describing their role in the minicase. As part of your answer, discuss the implic
> The U.S. Army Corps of Engineers maintains locks and dams on U.S. waterways, and engages consultants to analyze the kinds of issues described in the minicase. One of these consultants points out that even if it is below standard, concrete might last a hu
> Imagine a decision task in which you are to choose between two alternatives that involve blindly drawing a single chip from one of two urns, labeled A and B respectively. Both urns contain colored balls. The proportion of the different colors is describe
> Of the 10 psychological phenomena introduced in Chapter 1, identify which ones apply to the minicase, and give reasons to support your answer.
> Consider the financial planning case study in Chapter 13 about William and Mira Bold. At the end of the case, financial planner Claire begins to prepare for her second meeting with the Bolts. How can Claire use the information provided about the Bolts’ f
> Discuss if the manner in which people’s answers to questions 7.1 through 7.6 above provides an indication of their financial literacy.90 Questions 7.1: Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After five y
> Given the information provided in the chapter, discuss the psychological phenomena associated with Martha Stewart’s investment decisions.
> Precept Capital Management is a hedge fund located in Dallas, Texas. The fund employs several investment strategies, one of which is based on comparing the trajectory of stock prices to the trajectory of EPS forecasts. To illustrate the strategy, consi
> On the MHHE web site for this book, in the Chapter 13 files, you will find an Excel file with return data on Valeant and other firms. Use regression analysis to assess the factor structure of the stocks in the data file, and discuss your findings.
> The minicase in Chapter 3 contains an excerpt from a ValuEngine analyst report about the firm Aetna. The report states that ValuEngine’s forecasting models capture important features of stock price dynamics, such as short-term price reversals, intermedia
> Impact investors make investments in firms, organizations, and funds in order to generate positive social and environmental impacts alongside a financial return. Toniic is an organization dedicated to impact investing, whose members comprise ultra-high n
> Warren Buffett described his investment philosophy as being greedy when others are fearful and being fearful when others are greedy. Bob Goldfarb is the chairman of Ruane, Cunniff & Goldfarb, the investment company that manages the Sequoia Fund. Goldfarb
> In connection with chapter question 2, answer the following questions. a. What probability would you assign to Jack being an engineer if the question instead stated that the room with lawyers has 70 lawyers and the room with engineers contains 30 enginee
> On February 13, 2016, The New York Times published a story by journalist Jeff Sommer entitled “Dividends, Wall Street’s Battered Status Symbol.” Sommer discussed the fact that firms had been reducing their dividend payouts at the highest rate since the
> On January 26, 2005, James Stewart wrote about eBay in his Wall Street Journal column “Common Sense.” Stewart indicated that he would consider purchasing eBay stock in the wake of its decline. While acknowledging that eBay could not grow at a stratospher
> An overconfident manager misjudges the risk associated with a project and uses a discount rate that is too low. Suppose that the true situation is described by the situation in Question 4, but the manager believes the true situation to be the one describ
> Make three modifications to the example in Question 4 and then reanalyze the problem. The three changes are: (1) Change the up-move to 15 percent from 25 percent and the down-move to –13 percent from –20 percent. (2) Change the probability of an up-move
> Section 12.5 contains a real-option example involving a discount rate of 10 percent. Analyze how the real-option exercise policy is affected if the required return on the project is 15 percent instead of 10 percent. (See the Excel file Chapter 12 answer
> Suppose that the firm just had the one project (see Question 2) and you were thinking about acquiring the firm. What would the fair value of the acquisition be today, under the assumption that the firm would have to invest $75 million in the next two yea
> Imagine that the current date is t1. A year ago (t0), the firm invested $125 million in the project depicted in the illustrative example in Section 12.5 at a time when expected cash flows were $25 million. At that time, the firm’s managers thought that t
> Discuss whether the comments of John McCormack that were quoted in Section 12.2 involve any behavioral issues.
> Problem 7 in Chapter 9 pertains to Volkswagen’s having installed “defeat devices.” In describing the issue, media reports pointed to Volkswagen’s corporate culture, which according to the New York State Attorney General’s Office “incentivizes cheating an
> The financial instability hypothesis holds that firms take on excessive debt during periods of euphoria. Discuss the behavioral basis for this perspective, drawing if necessary from discussions in previous chapters.
> Consider the assumptions in Exhibit 3-2 that underlie the valuations associated with P/E, PEG, and price-to-sales. Analyze the degree to which these assumptions are mutually consistent, and correspondingly whether the heuristic equations were properly ap
> In respect to the experiences of financial firms in the lead-up to the global financial crisis, for each firm identify the most important psychological phenomena that destroyed value, and wherever possible link these phenomena to specific processes.
> What are the main psychological challenges that Ford CEO Alan Mulally faced in respect to Ford’s regular Thursday managers’ meetings, and how do these relate to issues of process and culture at the firm?
> In 2001 the chief executive of AOL Time Warner, Gerald Levin, sought to acquire AT&T’s cable business, the only cable business larger than the one already owned by AOL Time Warner. In doing so, he did not consult the firm’s board, let alone its chairman
> In May 2002, Hewlett-Packard acquired Compaq Computer in a takeover that featured considerable drama. In deliberating the acquisition, HP director Walter Hewlett, son of founder William Hewlett, suggested that the decision was not the right choice. He wa
> On February 23, 2000 MGM Grand, Inc. announced its intention to acquire Mirage Resorts, Inc. Over a three day window beginning the day before the announcement, MGM Grand’s market value fell by more than 3 percent on a risk-adjusted basis. Prior to the ac
> What insights are to be gleaned from the comments Steve Case made at various times about AOL’s acquisition of Time Warner?
> A traditional counterargument to the behavioral position described in the chapter is that the chapter arguments only focus on problematic acquisitions. For example, consider consumer products firm Colgate-Palmolive. In 1984 Reuben Mark became CEO of Colg
> Identify any psychological phenomena that were germane in HP’s acquisition of Autonomy.
> HP executives indicate that they use traditional discounted cash flow (DCF) analysis to evaluate investment projects and that the firm’s cost of capital is about 12 percent. Consider Exhibit 10-2 which shows how McKinsey consultants pro
> Under the purchase accounting method, an acquirer that pays more than the fair value for a target amortizes the difference over time on its income statement. In the 1990s, mergers between equally sized firms qualified for treatment as a pooling of intere
> Suppose that a university is attempting to predict the grade point average (GPA) of some graduating students based upon their high school GPA levels. GPA scores lie between 0 and 4. Below are some data for undergraduates at a university located in Califo
> In 2016, automobile manufacturer Volkswagen was charged in the United States for having installed software that engaged antipollution technology in diesel cars not at all times as regulations required, but only when undergoing emission tests. The firm ap
> Michael Jensen developed some of the seminal ideas underlying agency theory. He suggests that at the time the market value of Enron peaked at approximately $70 billion, its intrinsic value was approximately $30 billion. He describes Enron as having been
> When the Internet firm eToys went public in May 1999, its CEO Toby Lenk’s stockholdings were worth $850 million on the first day the company’s stock traded on the New York Stock Exchange. Lenk is quoted as having said to his CFO that day that they would
> Eleanor Bloxham is the founder and CEO of the Value Alliance Company and the Corporate Governance Alliance, and is a respected authority on matters involving corporate governance and valuation. In 2012, during an interview, she stated that she would rank
> Discuss any agency conflicts associated with HealthSouth’s pristine-audit program.
> In July 2003 Samuel Waksal, the founder of ImClone Systems Inc., began a seven-year prison term. In December 2001 Waksal received word that the Federal Drug Administration (FDA) was about to issue a negative report on ImClone’s cancer drug Erbitux. Altho
> In December of 1998, energy firm British Petroleum acquired American-based Amoco and became BP-Amoco. BP’s stock was listed on the London Stock Exchange and also traded on U.S markets through an American depositary receipt (ADR). Before the merger, Amoco
> Analyze whether there are any behavioral issues associated with CFO Judy Lewent’s views about Merck’s dividend policy in respect to the Vioxx incident discussed in Chapter 2.
> Analyze whether there are any behavioral issues in Cogent Communications’ dividend policy, which is described in the minicase for Chapter 7.
> On January 31, 2005, an article appeared in The Wall Street Journal comparing the relative performance of stocks in the S&P 500 that pay dividends with stocks in the S&P 500 that do not pay dividends.24 Between the end of the bear market in October 2002
> Imagine 100 book bags, each of which contains 1,000 poker chips. Forty-five bags contain 700 black chips and 300 red chips. The other 55 bags contain 300 black chips and 700 red chips. You cannot see inside any of the bags. One of the bags is selected at
> In 1996, Kodak paid a cash dividend of $1.60 per share. At year-end 1996, Kodak shares were trading at about $80 per share. Between 1997 and 2001, Kodak paid $1.76, and in 2002 raised its dividend to $1.80. Yet, despite the stable dividend payout, the pr
> An article that appeared in The Wall Street Journal in February 2001 described the experiences of several investors who held dividend-paying stocks.22 The article mentions two investors, Wayne Denny and George Gleghorn. Wayne Denny was 72 years old at th
> Ashland Inc. is an oil services and diversified chemical company that is located in Covington, Kentucky. In 2002 Ashland Inc. was paying an annual dividend of $1.10 per share and was planning to keep its dividend payout steady. However, the firm’s chairm
> On July 23, 2002, an article entitled “Investors Appreciate Dividends Again, See Them as Safer Bets in Bear Market” appeared on Associated Press Newswires.21 The article described two reasons why financial planners have routinely recommended that investo
> Solar energy firm Solyndra manufactured cylindrical solar panels that, while expensive to produce, were easy to install on the roofs of commercial buildings. The firm was founded in 2004. In March 2009, Solyndra had raised approximately $650 million in p
> In 2011, Millard Drexler, the CEO of fashion retailing firm J. Crew, together with two private equity firms, TPG and Leonard Green & Partners, did a $3 billion leveraged buyout. The strategy left J. Crew with approximately $15 billion of debt on its bala
> Imagine that Adaptec is contemplating a project that requires a $3.75 billion initial outlay and features an NPV of $466 million. The firm is all-equity financed and has $1 billion in cash that it plans to invest in the project. Adaptec’s current market
> Imagine that AutoNation is contemplating a project that requires a $350 million initial outlay and features an NPV of $48 million. The firm is all-equity financed and has $150 million in cash that it plans to invest in the project. AutoNation’s current m
