Videos
a.
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.
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.
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.
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.
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.
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Chapter 10 Solutions
INVESTMENTS(LL)W/CONNECT
- q10. The hubris motive for M&As refers to which of the following? Explains why mergers may happen even if the current market value of the target firm reflects its true economic value The ratio of the market value of the acquiring firm’s stock exceeds the replacement cost of its assets Agency problems Market power The Q ratioarrow_forwardBelow 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.arrow_forwardWhich of the following factors is not expected to generally have a favorable impact on the firm's cost of capital? Group of answer choices easy access to international capital markets. high degree of international diversification. high exposure to exchange rate fluctuations. all of thesearrow_forward
- 6. IPO price stabilization Which of the following strategies can underwriters use to prevent institutional investors from flipping? Check all that apply. They can require an overallotment clause in the underwriting agreement of the IPO. They can agree to make more shares of future IPOS available to investors that hold on to the initial shares for a relatively long period of time. They can require a lockup clause in the underwriting agreement of the IPO. They can agree to sell the shares in the IPO at a lower price than suggested by their bookbuilding analysis.arrow_forwardhigh quality firms low quality firms 50 75 100 higher lowerarrow_forwardThe 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_forward
- 1.What type of trading order are you likely to give your broker in each of the three circumstances below? a. You want to buy shares of company ABC to diversify your portfolio. You believe the share price is good and you want the trade done very quickly and cheaply. b. You want to buy shares of ABC into your portfolio of investment, but your analysis shows that the current stock price is too high given the firms prospects. You would like to purchase the shares at a price about 10% lower than the current market price. c. You are planning to purchase a brand-new car sometime in the next month or two and will sell your shares of ABC to provide the funds for your own down payment. You believe that the share price of ABC will rise in the coming few weeks. However, if you are wrong and the share price should drop suddenly you will not be able to afford to purchase the car. Therefore, you want to hold on to the shares for as long as possible, but still protect yourself against the risk of a…arrow_forwardWhat are the conditions for stock market efficiency? Is it possible that market for individual stocks could be highly efficient but market for whole companies could be less efficient? Explainarrow_forwardSuppose we observe from market data that, for a given non-dividend paying stock, F, ± Soer. What might explain the inequality in this relationship (i.e. why don't we observe Fo = Soe"T) if markets are efficient? Hint: try to identify real-world market frictions that might cause cases where Fo + Soe™" does not result in arbitrage opportunitiesarrow_forward
- The efficient markets hypothesis identifies three forms of market efficiency. (a) You observed that high-level managers make superior returns on investments in their company’s stock. Would this be a violation of weak-form market efficiency? Would it be a violation of strong-form market efficiency? (b) If the weak form of the efficient market hypothesis is valid, must the strong form also hold? Conversely, does strong form efficiency imply weak form efficiency? (c) Stock XYZ, which traded for several months at a price of K72, and then declines to K65. if the stock eventually begins to increase in price, K72 is considered a resistance level because investors who bought originally at K72 will be eager to sell their shares as soon as they can break even on their investment. If everyone in the market believes in resistance levels, why do these beliefs not become self-fulfilling prophecies?arrow_forwardAssume that Ford and GM are indentical firms. Using the comparable company analysis, which one would appear to be a better stock buy? Firm P/E Ratio Ford 5.2 GM 8.3 a) Ford b) GMarrow_forwardWhich of the following statements is CORRECT? a. A good goal for a rm's management is maximization of expected EPS. b. Most business in the U.S. is conducted by corporations, and corporations' popularity resultsprimarily from their favorable tax treatment. c. Because most stock ownership is concentrated in the hands of a relatively small segment ofsociety, rms' actions to maximize their stock prices have little benet to society. d. Corporations and partnerships have an advantage over proprietorships because a sole proprietoris exposed to unlimited liability, but the liability of all investors in the other types of businesses ismore limited. e. The potential exists for agency conicts between stockholders and managers. Please explain.arrow_forward
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT