PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 13, Problem 19PS
Behavioral finance True or false?
- a. Most managers tend to be overconfident.
- b. Psychologists have found that, once people have suffered a loss, they are more relaxed about the possibility of incurring further losses.
- c. Psychologists have observed that people tend to put too much weight on recent events when
forecasting . - d. Behavioral biases open up the opportunity for easy arbitrage profits.
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Why does behavioral finance considered investors as "normal" yet biased and errors? Support being subject to decision-making your answer.
A financial manager’s goal of maximizing current or short-term earnings may not be appropriate because
a. earnings are subjective; they can be defined in various ways such as accounting or economic earnings
b. increased earnings may be accompanied by unacceptably higher levels of risk
c. All of the choices
d. it fails to consider the timing of the benefits
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True
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Chapter 13 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 13 - Market efficiency True or false? The...Ch. 13 - Prob. 2PSCh. 13 - Market efficiency Which (if any) of these...Ch. 13 - Prob. 4PSCh. 13 - Market efficiency How would you respond to the...Ch. 13 - Market efficiency Respond to the following...Ch. 13 - Prob. 7PSCh. 13 - Prob. 8PSCh. 13 - Market efficiency evidence Which of the following...Ch. 13 - Prob. 10PS
Ch. 13 - Prob. 11PSCh. 13 - Prob. 12PSCh. 13 - Market efficiency implications What does the...Ch. 13 - Prob. 14PSCh. 13 - Prob. 15PSCh. 13 - Abnormal returns Here are alphas and betas for...Ch. 13 - Prob. 18PSCh. 13 - Behavioral finance True or false? a. Most managers...Ch. 13 - Prob. 20PSCh. 13 - Prob. 21PSCh. 13 - Prob. 22PS
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- All else the same, which of the following management decisions would help alleviate the problem of a buildup of excess cash? O Increase credit terms to customer; i.e. allow them more time to pay Borrow short term to increase the size of the Interest Tax Shield O Reduce credit terms to customers: i.c. make them pay sooner O Reduce the dividend payout ratio to crcate higher levels of retained earnings In evaluating the accuracy of your forecast, which of the following might be indicative of the need for a revised forecast? O The company's Dividend Payout Ratio is likely too high in the forecast period O The growth rate of Sales is trending toward 4-5% over the forecast period O The ratio of Sales/(Invested Capital) is much higher in the forecast period than in the Historical period from which you derived your forecast O The firm's Forecast D/E ratio is holding steady over the course of the forecast An effective financial plan can be either static or dynamic (True or False) O True Falsearrow_forwardThe efficient markets hypothesis True or False: The efficient markets hypothesis holds only if all investors are rational. False True Almost all financial theory and decision models assume that the financial markets are efficient. The informational efficiency of financial markets determines the ability of investors to “beat” the market and earn excess (or abnormal) returns on their investments. If the markets are efficient, they will react rapidly as new relevant information becomes available. Financial theorists have identified three levels of informational efficiency that reflect what information is incorporated in stock prices. Identify the form of capital market efficiency under the efficient market hypothesis described in the following statement: Current market prices reflect all information contained in past price movements. This statement is consistent with: Strong form efficiency Semistrong form efficiency Weak form efficiency…arrow_forwardBehavioural finance specialist may concede that there are no easy profits but argue b) that arbitrage is costly and sometimes slow-working, so that the deviations from fair value may persist. The "no free lunch" principle gives financial managers lessons of market efficiency. Discuss any four (4) lessons of market efficiency and give an example showing the lesson's relevance to financial managers.arrow_forward
- according to principles of behavioural finance, which statements is True? a) investors always behave in rational manner b) investors have tendency to become overconfident c) investors never make decisions based on psychological bias or emotions d) investors overestimate the risk of given situation to err on the side of safety.arrow_forwardIn the standard model of investment management, investors care only for: a. The return and the risk of their portfolio. b. The return, the risk and the degree of ambiguity of their portfolio. c. The return of their portfolio when the market is bullish. d. The relative level of profit they will make in comparison to other investors.arrow_forwardThe house money effect is used to explain the tendency of investors to take higher risks when reinvesting profit earned than when they are investing their savings or initial capital Select one:TrueFalsearrow_forward
- The efficient market hypothesis says that Multiple Choice market prices reflect underlying asset values. individual investors should not participate in the financial markets. investors should expect to earn abnormal profits. financial managers can accurately time stock and bond sales. creative accounting can be used to inflate stock prices.arrow_forwardDo you think investors can earn abnormal returns in financial markets that are at least semi strong-form efficient?arrow_forwardDescribe clearly how theories from behavioural finance can justify the following abnormal phenomena of investment: (1) Investors exhibit tendency to overpay for assets with poor average return but a potential to deliver a huge payoff, such as penny stocks or corporate bonds of financially distressed companies. (2) Investors exhibit tendency to sell winning stocks too early but hold losing stocks for too longarrow_forward
- Forecasting a firm's future sales is the key element in developing a financial plan, yet forecasting can be extremely difficult in some industries. If forecast is very poor, does this mean that the financial planning process if not worthwhile? Explain your answer.arrow_forwardA borrower who takes out a loan usually has better information about the potential returns and risks of the investment projects he plans to undertake than the lender does. This inequality of information is called O a. adverse selection. b. moral hazard. C. asymmetric information. O d. noncollateralized risk.arrow_forwardWould it be possible for a company to report negative free cash flow and still be highlyvalued by investors; that is, could a negative free cash flow ever be viewed optimisticallyby investors? Explain your answer.arrow_forward
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