Principles of Corporate Finance
Principles of Corporate Finance
13th Edition
ISBN: 9781260465099
Author: BREALEY, Richard
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 13, Problem 19PS

Behavioral finance True or false?

  1. a. Most managers tend to be overconfident.
  2. b. Psychologists have found that, once people have suffered a loss, they are more relaxed about the possibility of incurring further losses.
  3. c. Psychologists have observed that people tend to put too much weight on recent events when forecasting.
  4. d. Behavioral biases open up the opportunity for easy arbitrage profits.
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Scenario one: Under what circumstances would it be appropriate for a firm to use different cost of capital for its different operating divisions? If the overall firm WACC was used as the hurdle rate for all divisions, would the riskier division or the more conservative divisions tend to get most of the investment projects? Why? If you were to try to estimate the appropriate cost of capital for different divisions, what problems might you encounter? What are two techniques you could use to develop a rough estimate for each division’s cost of capital?
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