EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
expand_more
expand_more
format_list_bulleted
Videos
Question
Chapter 10, Problem 19PS
a.
Summary Introduction
To evaluate: The reason behind small firms having relatively high loadings on the SMB factor.
Introduction:
SMB Factor: SMB, when expanded, is small minus big. When a return on portfolio related to small stocks is earned more than the return on portfolio related to large stocks it can be termed as SMB.
HML factor: When the return on a portfolio of high book to market stocks is more than the low book to market stocks, that particular portfolio is considered as HML.
b.
Summary Introduction
To evaluate: The stock market behavior of the merged firm to differ from that of a portfolio of two previously independent firms.
Introduction:
SMB Factor: SMB, when expanded, is small minus big. When a return on portfolio related to small stocks is earned more than the return on portfolio related to large stocks it can be termed as SMB.
HML factor: When the return on a portfolio of high book to market stocks is more than the low book to market stocks, that particular portfolio is considered as HML.
c.
Summary Introduction
To evaluate: The effect on merger after market capitalization.
Introduction:
SMB Factor: SMB, when expanded, is small minus big. When a return on portfolio related to small stocks is earned more than the return on portfolio related to large stocks it can be termed as SMB.
HML factor: When the return on a portfolio of high book to market stocks is more than the low book to market stocks, that particular portfolio is considered as HML.
d.
Summary Introduction
To evaluate: The prediction of the FAMA-French model for the risk premium on the merged firm compared to the weighted average of two-component companies.
Introduction:
SMB Factor: SMB, when expanded, is small minus big. When a return on portfolio related to small stocks is earned more than the return on portfolio related to large stocks it can be termed as SMB.
HML factor: When the return on a portfolio of high book to market stocks is more than the low book to market stocks, that particular portfolio is considered as HML.
e.
Summary Introduction
To evaluate: The problems faced by the application of the FF model in case of a merger.
Introduction:
SMB Factor: SMB, when expanded, is small minus big. When a return on portfolio related to small stocks is earned more than the return on portfolio related to large stocks it can be termed as SMB.
HML factor: When the return on a portfolio of high book to market stocks is more than the low book to market stocks, that particular portfolio is considered as HML.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Below are the average initial returns are constructed for different countries, although all weight each IPO equally. In general, in countries where market prices are available immediately after offerings, the one-day raw return (offer price to close) is reported.Average initial returns on French, Japanese, and Taiwanese IPOs, by selling mechanism
How can book-building and the roadshow be used as a superior mechanism in a marketing campaign? Elaborate in detailsb) In what ways underpricing appropriate then overpricing? Discuss.
Which of the following is FALSE about IPO underpricing?
a) The average underpricing in US IPOs is between 15-20%
B) IPOs in Europe and the Americas on average exhibit less underpricing compared to IPOs in Asian and Pacific markets
C) The underpricing, and the subsequent large returns on the first day of trading, helps the firm receive more money for the shares offered in the IPO.
D) Average IPO underpricing in the US is around 17%.
Which of the following would be a viable way to earn abnormally high trading profits if markets are semistrong-form efficient?a. Buy shares in companies with low P/E ratios.b. Buy shares in companies with recent above-average price changes.c. Buy shares in companies with recent below-average price changes.d. Buy shares in companies for which you have advance knowledge of an improvement in the management team.
Chapter 10 Solutions
EBK INVESTMENTS
Ch. 10 - Prob. 1PSCh. 10 - Prob. 2PSCh. 10 - Prob. 3PSCh. 10 - Prob. 4PSCh. 10 - Prob. 5PSCh. 10 - Prob. 6PSCh. 10 - Prob. 7PSCh. 10 - Prob. 8PSCh. 10 - Prob. 9PSCh. 10 - Prob. 10PS
Ch. 10 - Prob. 11PSCh. 10 - Prob. 12PSCh. 10 - Prob. 13PSCh. 10 - Prob. 14PSCh. 10 - Prob. 15PSCh. 10 - Prob. 16PSCh. 10 - Prob. 17PSCh. 10 - Prob. 18PSCh. 10 - Prob. 19PSCh. 10 - Prob. 1CPCh. 10 - Prob. 2CPCh. 10 - Prob. 3CPCh. 10 - Prob. 4CPCh. 10 - Prob. 5CPCh. 10 - Prob. 6CPCh. 10 - Prob. 7CPCh. 10 - Prob. 8CP
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Suppose you are the CEO of a large firm in a service business and you think that by acquiring a certain competing firm, you can generate growth and profits at a greater rate for the combined firm. Youhave asked some financial analysts to study the proposed acquisition/merger. Do you think valuechain analysis would be useful to them? Why or why not?arrow_forwardPizza Palace (PP), is considering purchasing a smaller chain, Western Mountain Pizza. PP’s analysts expect the merger to result in incremental net cash flows as follows: Y1=$1,900,000, Y2 = $2,200,000, Y3 = $3,500,000, Y4 =$5,800,000. In addition, Western’s Y4 cash flows are expected to grow at a constant rate of 4% after Y4. Western’s post merger beta is expected to be 2 and its tax rate would be 30%. The risk free rate is presently 6% and the market risk premium is 5%. What is the value of Western to Pizza Palace?arrow_forwardYou have been asked to assess the impact of a proposed acquisition on the beta of a firm and have been provided the following information on the two firms involved in the deal: The risk-free rate is 4% and the equity risk premium is 6%. Now assume that Acquirer plans to retire all of Target’s debt and that it will be able to buy Target’s equity at the current market price. If Acquirer would like to have a levered beta of 1.35 for the combined firm after the transaction, estimate how much new debt it will need to raise to finish this acquisition.arrow_forward
- The following graph represents the Cumulative Average Abnormal Return (CAAR) for the stocks of companies targeted for take-over. Which of the following statements is true? a. In a weak form efficient market, t* is the actual takeover event (i.e. the time when the legal takeover transaction is completed) b. In a semi-strong form efficient market, t* is the takeover announcement event c. In a strong form efficient market, t* is the acquiring company takeover decision event (i.e. the time when an acquiring company decides to launch a takeover) d. (a) & (b) e. (b) & (c)arrow_forwardohnson’s management believes that the most reliable way to value a potential target firm is by averaging multiple valuation methods, since all methods have their shortcomings. Consequently, Johnson’s Chief Financial Officer (CFO) estimates that the value of Jameson Limited, a potential takeover target could range, before an acquisition premium is added, from a high of $650 million using discounted cash flow analysis to a low of $500 million using the comparable companies’ relative valuation method. A valuation based on a recent comparable transaction is $672 million. The CFO anticipates that Jameson Limited’s management and shareholders would be willing to sell for a 20 percent acquisition premium, based on the premium paid for the recent comparable transaction. The CEO asks the CFO to provide a single estimate of the value of Jameson Limited based on the three estimates. In calculating a weighted average of the three estimates, the CFO gives a value of 0.6 to the recent transactions…arrow_forwardNizwa investment company is willing to buy the equity shares directly from various companies as they think that buying the shares at the first moment will always give benefits for long timeThe market from where this transaction will be carried out is termed as a.Primary Market b.Regular Market c.Secondary Market d.None of the options A financial statement which shows the status of the worth of a company on a certain date is known as a.Cash flow statement b.Balance Sheet c.All of the optionsarrow_forward
- What is the HHI for a market with 4 firms, each with one quarter of the market share? 1000 15000 2500 3000 Suppose there is a proposed merger between two of the firms in this market. The resulting market would be 3 firms, two with 25% of the market share and one with 50%. What would the new HHI be? 2950 3190 3700 3750 Is it likely that this merger will be challenged? yes no not enough information to tellarrow_forwardYou read a story in the newspaper announcing the proposed merger of Dell Computer and Gateway. The merger is expected to greatly increase Gateway’s profitability. If you decide to invest in Gateway stock, you can expect to earn (a) above-average returns since you will share in the higher profits. (b) above-average returns since your stock price will definitely appreciate as higher profits are earned. (c) below average returns since computer makers have low-profit rates. (d) a normal return since stock prices adjusts to reflect expected changes in profitability almost immediately.arrow_forwardFor Question 1, 2, and 3, use the following information: 1.) Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that both firms have no debt outstanding. Firm B Firm T Shares outstanding 6,500 1,500 Price per share $ 45 $ 15 Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $10,600. If Firm T is willing to be acquired for $20 per share in cash, what is the NPV of the merger? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Please round to the nearest dollar and format as "X,XXX" 2.) Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that both firms have no debt outstanding. Firm B Firm T Shares outstanding 6,500 1,500 Price per share $ 45 $…arrow_forward
- Initial Public Offering (IPO) - In the chapter we are provided with an example of the Industrial and Commercial Bank of China offering shares of their corporation to the public. The biggest pro of a firm based in Mexico taking this route, would be the gain of capital. A con that comes with this is a loss of control of your company. IF you were to lose majority control over your business, this could have potentially catastrophic impacts. The Global Bond Market - "Companies will issue international bonds if they believe it will lower their cost of capital" Foreign bonds - On the pro side of foreign bonds, the firm can raise capital in foreign currencies. This opens up more potential investors to the firm. A con of foreign bonds would be the exposure of foreign exchange risk. Foreign exchange risk can be risky, and if the Mexican peso depreciates significantly on the foreign exchange market, this could potentially crush the Mexican capital market. Eurobonds - Eurobonds are another and…arrow_forwardWhich statement below is incorrect? Select one: A. Compared to interview, survey is more suitable to ask standardised questions. B. If a firm has more intangible assets, according to the trade-off theory, it is more likely to have a higher leverage. C. If a firm is more profitable, according to the pecking order theory, it should use less debt for financing. D. The CAPM model implies that a stock with a higher beta has a higher return on average.arrow_forwardTwo other interesting points brought up by Miller and Modigliani, as highlighted in Berk and DeMarzo (2020) were that “In perfect capital markets, investors are indifferent between the firm distributing funds via dividends or share repurchase” (p. 612) and that “In perfect capital markets, holding fixed the investment policy of a firm, the firm’s choice of dividend policy is irrelevant and does not affect the initial share price” (p. 614). Respond to this question by focusing on either dividend payout policy or the decision between stock repurchases and dividend payouts and illustrate how the assumptions made to support these axioms tend to oversimplify what occurs.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
How to Invest in Foreign Stocks (INVESTING FOR BEGINNERS); Author: The Money Tea;https://www.youtube.com/watch?v=Qzj4VozcO9s;License: Standard Youtube License