EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103164535
Author: DeMarzo
Publisher: PEARSON
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Textbook Question
Chapter 13, Problem 13P
Suppose that all investors have the disposition effect. A new stock has just been issued at a price of $50, so all investors in this stock purchased the stock today. A year from now the stock will be taken over, for a price of $60 or $40 depending on the news that comes out over the year. The stock will pay no dividends. Investors will sell the stock whenever the price goes up by more than 10%.
a. Suppose good news comes out in 6 months (implying the takeover offer will be $60). What
b. Assume that you are the only investor who does not suffer from the disposition effect and your trades are small enough to not affect prices. Without knowing what will actually transpire, what trading strategy would you instruct your broker to follow?
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Students have asked these similar questions
Consider the following simplified financial statements for the Yoo Corporation (assuming no income taxes):
Income Statement
Balance Sheet
Sales
Costs
$ 40,000 Assets
34,160
$26,000
Debt
Equity
$ 7,000
19,000
Net income $ 5,840
Total
$26,000
Total
$26,000
The company has predicted a sales increase of 20 percent. Assume Yoo pays out half of net income in the
form of a cash dividend. Costs and assets vary with sales, but debt and equity do not.
Prepare the pro forma statements. (Input all amounts as positive values. Do not round intermediate
calculations and round your answers to the nearest whole dollar amount.)
Pro forma income statement
Sales
Costs
$ 48000
40992
Assets
$ 31200
Pro forma balance sheet
Debt
7000
Equity
19000
Net income
$ 7008
Total
$ 31200
Total
30304
What is the external financing needed? (Do not round intermediate calculations. Negative amount
should be indicated by a minus sign.)
External financing needed
$
896
An insurance company has liabilities of £7 million due in 10 years' time and
£9 million due in 17 years' time.
The assets of the company consist of two zero-coupon bonds, one paying
£X million in 7 years' time and the other paying £Y million in 20 years' time.
The current interest rate is 6% per annum effective.
Find the nominal value of X (i.e. the amount, IN MILLIONS, that bond X pays
in 7 year's time) such that the first two conditions for Redington's theory of
immunisation are satisfied.
Express your answer to THREE DECIMAL PLACES.
An individual is investing in a market where spot rates and forward rates
apply.
In this market, if at time t=0 he agrees to invest £5.3 for two years, he will
receive £7.4 at time t=2 years. Alternatively, if at time t=0 he agrees to invest
£5.3 at time t=1 for either one year or two years, he will receive £7.5 or £7.3
at times t=2 and t=3, respectively.
Calculate the price per £5,000 nominal that the individual should pay for a
fixed-interest bond bearing annual interest of 6.6% and is redeemable after 3
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Chapter 13 Solutions
EBK CORPORATE FINANCE
Ch. 13.1 - If investors attempt to buy a stock with a...Ch. 13.1 - What is the consequence of investors exploiting...Ch. 13.2 - How can an uninformed or unskilled investor...Ch. 13.2 - Under what conditions will it be possible to earn...Ch. 13.3 - Do investors hold well-diversified portfolios?Ch. 13.3 - Why is the high trading volume observed in markets...Ch. 13.3 - What must be true about the behavior of small,...Ch. 13.4 - What are several systematic behavioral biases that...Ch. 13.4 - Prob. 2CCCh. 13.5 - Prob. 1CC
Ch. 13.5 - Prob. 2CCCh. 13.6 - Prob. 1CCCh. 13.6 - Prob. 2CCCh. 13.7 - Prob. 1CCCh. 13.7 - How can you use the Fama-French-Carhart factor...Ch. 13.8 - Which is the most popular method used by...Ch. 13.8 - Prob. 2CCCh. 13.8 - Prob. 3CCCh. 13 - Assume that all investors have the same...Ch. 13 - Assume that the CAPM is a good description of...Ch. 13 - Prob. 3PCh. 13 - Prob. 4PCh. 13 - Prob. 5PCh. 13 - Explain what the following sentence means: The...Ch. 13 - You are trading in a market in which you know...Ch. 13 - Prob. 8PCh. 13 - Your brother Joe is a surgeon who suffers badly...Ch. 13 - Prob. 11PCh. 13 - Suppose that all investors have the disposition...Ch. 13 - Prob. 14PCh. 13 - Prob. 15PCh. 13 - Prob. 16PCh. 13 - Prob. 17PCh. 13 - Prob. 18PCh. 13 - Each of the six firms in the table below is...Ch. 13 - Prob. 20PCh. 13 - In Problem 20, assume the risk-free rate is 3% and...Ch. 13 - Prob. 22PCh. 13 - Prob. 23PCh. 13 - Prob. 24PCh. 13 - Explain why if some investors are subject to...Ch. 13 - Prob. 26PCh. 13 - Prob. 27PCh. 13 - You are currently considering an investment in a...Ch. 13 - Prob. 29P
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