Consider a trivia test consisting of 10 questions for you to answer from memory alone. In addition to giving your best guess, consider a range: a low guess and a high guess so that you feel 90 percent confident that the right answer will lie between your low guess and your high guess. Try not to make the range between your low guess and high guess too narrow. Otherwise, you will appear overconfident. At the same time, try not to make the range between your low guess and high guess too wide. This will make you appear under confident. If you are well-calibrated, you should expect that only one out of the 10 correct answers you provide does not lie between your low guess and your high guess. After each question, write down three numbers, your best guess, low guess, and high guess.25 a. What is the average weight of an adult blue whale, in pounds? b. In what year did Leonardo da Vinci paint the Mona Lisa? c. How many independent countries were there at the end of the year 2000? d. What is the air distance, in miles, from Paris, France to Sydney, Australia? e. How many bones are in the human body? f. How many combatants were killed in World War I? g. How many books were in the U.S. Library of Congress at the end of the year 2000? h. In miles, how long is the Danube River? i. In miles per hour, how fast does the Earth spin at the equator? j. How many transistors are in Intel’s Pentium III processor?
> 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
> On December 19, 2000, an article appeared in The Wall Street Journal discussing stock price declines that followed share repurchases made by AT&T, Intel, Microsoft, and Hewlett-Packard.51 The article mentions that Warren Buffett, chairman of Berkshire Ha
> From January 1990 through March 1993, the stock of Cypress Semiconductor Corp. underperformed the S&P 500 by 26.5 percent on a cumulative basis. Then in April, the firm announced that its board authorized the repurchase of an additional one million commo
> In August 2004, Google went public at a price of $85 per share. One year later, its stock price reached $285, as the firm’s earnings consistently exceeded analysts’ consensus forecasts. At that time, its forward P/E ratio was 37.5 and its ratio of book-t
> The Duke/CFO study on financial executives’ forecasts for the 10-year horizon features a negative correlation between forecasts of return and forecasts of volatility. Discuss this property in light of the finding that the correlation between executives’
> Chapter 3 contains a discussion about how the Morgan Stanley analyst team computed a discount rate to use in its free cash flow valuation of eBay stock. Discuss any similarities between the procedure the analysts used and issues described in Chapter 6.
> One behavioral school of thought holds that in complex situations where it is difficult to estimate probabilities, simple heuristics are generally better than complicated heuristics. Discuss this perspective in the context of the “one size fits all” disc
> In 1999, the S&P 500 returned 21 percent, closing out a streak of five consecutive stellar up-years. Then in 2000, the S&P 500 returned −9.1 percent. In 2001, the S&P 500 returned −16.1 percent. At the end of 2001, Wall Street strategists who were interv
> During a presentation in February 2001, the CFO of Palm Inc. was asked how frequently her firm assesses and uses its cost of capital. In response, she stated that Palm computes its cost of capital “from time to time.” As far as computing the expected ret
> Analyze the assessment of Palm made by analyst Paul Sagawa.
> Use the ideas developed in this chapter to assess whether Palm and 3Com were efficiently priced on Palm’s first day of trading.
> Discuss whether any of the three IPO phenomena apply in regard to the Palm IPO described in the Behavioral Pitfalls box.
> In 2004, 55 percent of firms provided guidance to analysts, down from 72 percent in the prior year.30 Before Google’s IPO, the firm’s executives announced that they did not plan to issue earnings guidance to analysts. Discuss the pros and cons of such a
> Suppose that you are offered the opportunity to accept a risk involving the toss of a fair coin, in which you will win $450 if heads comes up and lose $450 if tails comes up. a. Would you accept this opportunity or reject it? b. If the stake size was cha
> On August 19, 2004, the Internet search firm Google went public, at an offer price of $85 per share. The IPO was unconventional in that Google used an auction to determine its offer price and to sell shares to investors. In this respect, underwriters did
> For many years, the large retail firm Walmart chose not to provide guidance. The firm’s legendary founder, Sam Walton, wrote in his autobiography that he did not care what the market thought. Beginning in 1994, Walmart’s earnings announcements generated
> Consider the comments of Brian Walker, the president of Herman-Miller North America, who was quoted in the chapter as having said: “For dot.coms, it appears that the market has implicitly capitalized a lot of those costs. The market views their negative
> In April 2003, analysts at Morgan Stanley and Prudential had set 12-month target prices of $106 and $108 for the firm eBay. At that time, eBay’s stock price was $89.22 and the consensus forecast for eBay’s EPS was $1.45. Subsequently, eBay split its stoc
> One of the points made in the discussion about the construction of the Anglo-French tunnel is that engineers designed the tunnels before they designed the trains, so there were many design changes because of health and safety. Are there any behavioral is
> Consider the contention that excessive optimism and overconfidence are important characteristics of leadership. Might these traits help managers initiate and complete daunting projects that they would otherwise reject or abandon? Discuss this contention.
> Consider Robert Galvin’s approach to evaluating the satellite project proposal. The text suggests that in not developing discounted cash flow analysis, Galvin’s approach was flawed. In hindsight, Iridium was a failed project for Motorola, and even positi
> In 1999 Iridium declared bankruptcy and was sold to private investors. Suppose that you were to learn that by the end of 2003, Iridium had gone out of business. How surprised would you be? How would you imagine that the events surrounding Iridium’s liqui
> In what way were the situations at Boeing (with the 787) and Motorola (with the Iridium project) the same, and in what way were they different? Discuss this question through the lens of the planning fallacy.
> In what way were the situations at Boeing (with the 787) and Airbus (with the A380) similar, and in what way were they different? Discuss this question through the lens of the planning fallacy.
> Imagine yourself at a conference center, where there are two groups meeting in adjoining rooms, one a group of lawyers and the other a group of engineers. In fact, the room with lawyers contains 30 lawyers and the room with engineers contains 70 engineer
> In respect to the Morgan Stanley 2003 report on eBay, eBay’s annualized geometric return between May 2003 and December 2014 was 7.9 percent, its annualized arithmetic return was 14.2 percent, and its annualized arithmetic risk premium was 12.7 percent. I
> Consider the following excerpt from a Prudential report on Wal-Mart, dated May 13, 2003.16 The report states: We are maintaining our Hold rating on Wal-Mart as we believe the stock’s current valuation of 28 times our 2003 EPS estimate of $2.01 adequately
> In 2005, eBay CFO Rajiv Dutta stated that eBay’s investments were reflected in the firm’s income statement rather than its balance sheet. Discuss the extent to which Dutta’s perspective, in foresight, was reflected in the Morgan Stanley team’s April 2003
> Discuss Scott McNealy’s comments about sentiment in his interview with Fortune magazine. In your answer, describe any valuation metric Scott McNealy mentions. Do McNealy’s comments suggest that Sun engaged either in catering behavior or market timing dur
> Which psychological phenomena might have been at play in the negotiations between Carol Bartz and Steve Ballmer?
> Was there an endowment effect at work at the Hewlett Foundation?
> Did the composition of the Packard Foundation finance committee predispose it to groupthink?
> With five family members and the former CEO of HP comprising half the Packard Foundation board, was the Packard board largely a homogenous group or a heterogeneous group?
> In your view, how similar is the personality of Cogent Communications CEO Dave Schaeffer to the personality of PSINet CEO William Schrader?
> The Times article notes that three days after the ACP awarded a $158 million contract to the Spanish firm that manufactures the tugboats, the son of the canal administrator joined the law firm representing the tugboat manufacturer. Discuss whether such a
> Answer the following six sub questions: 7.1. Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After five years, how much do you think you would have in your account if you left the money to grow? a. More than $102 b
> In the spring of 2003, analysts at Prudential established a target price for eBay, justifying the P/E values in their analysis by appeal to PEG. Their report stated that their assumptions of a P/E of 75 to multiply 2003 earnings, and a P/E of 50 to multi
> Consider a statement that begins, “I see myself as someone who” Below are five phrases that might conclude this statement. Associate exactly one of the big five psychological characteristics to each phrase. a. is reserved b. tends to find fault with othe
> HP director Patricia Dunn works in the banking industry, where consolidation mergers have worked out well in the long run but are vulnerable in the first two years. She responded positively to the McKinsey consultants’ statements that a merger between HP
> In the chapter discussion of the merger between HP and Compaq, HP director Sam Ginn initially voiced doubts about the deal. However, the McKinsey experts retorted that even a slim profit in PCs would mean a decent return on invested capital. Do you detec
> On April 23, 2003, The Wall Street Journal published an article suggesting that the analysts following eBay were excessively optimistic about eBay’s future revenue stream. The article pointed out that the second most optimistic analyst was Safa Rashtchy,
> Consider the responses to a survey conducted of geologists working in the mining industry.46 The survey put the following question to the geologists: “If an economic deposit was discovered tomorrow, how many years would pass before it could be put into p
> An episode of the BBC program Horizons featured the following experiment. A researcher in a park with a lot of pedestrians invited passersby to examine an unopened bottle of wine, which the researcher stated he had just purchased at a nearby wine shop, a
> The March 11, 2004, issue of Businessweek magazine reported that Standard & Poor’s had reduced Sun Microsystem’s debt rating to junk status. Over the course of the next two days, Sun’s stock price fell by 11 percent. Both S&P and the financial analysts c
> Analyst Safa Rashtchy developed his 2010 forecast for eBay’s revenue by assuming that its annual growth would be about a 30 percent compounded annual growth rate between 2002 and 2010. In the previous year, eBay’s revenue had grown at the rate of 62 perc
> The column “Ahead of the Tape” that appeared in the February 13, 2004, issue of The Wall Street Journal states that prudent investors prefer to value firms using free cash flow instead of EBITDA. The article explains that the typical definition of free c
> Despite the growing popularity of cellular phones during the middle and late 1990s, Iridium undertook a $180 million promotional campaign to launch its product. It ran advertisements in The Wall Street Journal, Fortune magazine, and 37 airline magazines.
> In the section of the book web site for this chapter, you will find an Excel file containing counterparts to the free cash flow table in Exhibit 3-3, but for forecasts and valuations made in 2010 and 2013. Use the analysis described in the chapter to inv
> On May 20, 2004, The Wall Street Journal ran a front page story entitled “Biotech’s Dismal Bottom Line: More Than $40 Billion in Losses.” The article makes several points. First, the majority of biotechnology firms have produced losses, with the result t
> Compare two positions about Merck’s handling of Vioxx. The first position is that Merck should have warned patients about the enhanced risk of heart attack or stroke (after prolonged use of the drug) with prominent language on drug packaging and ads. Eri
> On November 2, 2004, The Wall Street Journal published an article describing the manner in which Merck’s executives made decisions about Vioxx. The Wall Street Journal article pointed out that the November 2000 issue of The New England Journal of Medicin
> Merck’s VIGOR study used 8,000 subjects. Notably, Merck chose to include only subjects whose risk of experiencing a heart attack was low. Half the subjects in the study received Vioxx, and the other half received naproxen. Of those receiving Vioxx, 20 ha
> At the beginning of 2001, Merck’s CFO Judy Lewent predicted that Vioxx sales for the year would be between $3 and $3.5 billion. In June she qualified her prediction to say that although Vioxx sales would be closer to the lower end of th
> Did Merck’s managers exhibit confirmation bias in their assessment of Vioxx? Discuss this question.
