Q&A Hero

Q: Give evidence both for and against market efficiency.

Q: Banks are commonly used to provide bridge or temporary financing to pay all or a portion of the purchase price and meet possible working capital requirements until permanent financing can be found. True or False

Q: What is a rational bubble?

Q: How do loss aversion, overconfidence of investors, and social contagion affect market efficiency?

Q: Only acquiring firms perform due diligence. True or False

Q: Explain what the market reaction will be in an efficient market if a firm announces a fully anticipated filing for bankruptcy.

Q: The number of selection criteria should be as extensive as possible to ensure that all factors relevant to the firms decision-making process are considered. True or False

Q: What is the optimal investment strategy according to the efficient market hypothesis? Why?

Q: The first step in establishing a search plan for potential acquisition or merger targets is to identify the primary screening or selection criteria. True or False

Q: How is it possible that a firm can announce a record-breaking loss, yet its stock price rises when the announcement is made?

Q: What could Mattel have done to protect itself against risks uncovered during due diligence?

Q: Why are expectations important in understanding how financial instruments are valued?

Q: How did the K2 negotiating strategy seek to meet the primary needs of the Fotoball shareholders and employees?

Q: Technical analysis is a popular technique used to predict stock prices by studying past stock price data and searching for patterns such as trends and regular cycles.

Q: What was the role of strategic controls in implementing the K2 business plan?

Q: Having performed well in the past indicates that an investment adviser or a mutual fund will perform well in the future.

Q: What alternatives to M&As could K2 have employed to pursue its growth strategy? Why were the alternatives rejected?

Q: It is probably a good use of an investor's time to watch as many shows featuring technical analysts as possible.

Q: How did K2s acquisition plan objective support the realization of its corporate mission and strategic objectives?

Q: Loss aversion means the unhappiness a person feels when he or she suffers a monetary loss exceeds the happiness the same person experiences from receiving a monetary gain of the same amount.

Q: Why was Gore Technology Group able to do what Mattel could not do in a year.?

Q: "Short selling" refers to the practice of buying a stock and holding it for only a short time before selling it.

Q: Despite being aware of extensive problems, Mattel proceeded to acquire The Learning Company. Why? What could Mattel to better protect its interests? Be specific.

Q: In an efficient market, abnormal returns are not possible, even using inside information.

Q: What do you think are the major challenges faced by the buyer in financing small transactions transaction in this manner?

Q: If the markets are efficient, the optimal investment strategy will be to buy and hold so as to minimize transaction costs.

Q: In your opinion, are earnouts more appropriate for firms in certain types of industries than for others? If so, give examples. Explain your answer.

Q: Describe conditions under which an earnout might be most appropriate.

Q: The evidence suggests technical analysts are not superior stock pickers.

Q: How could Reliable have protected itself from the outstanding warranty claims in the definitive agreement of purchase and sale?

Q: Technical analysts look at historical prices for information to project future prices.

Q: Should Reliable Appliances have been able to anticipate this problem from its due diligence of Quality-Built? Explain how this might have been accomplished.

Q: Evidence that a mutual fund has performed extraordinarily well in the past contradicts the efficient market hypothesis.

Q: Describe the measurable and non-measurable damages to McKessons shareholders resulting from HBOs fraudulent accounting activities.

Q: If the security markets are truly efficient, there is no need to pay for help selecting securities.

Q: McKesson, a drug wholesaler, acquired HBO, a software firm. How do you think the fact that the two firms were in different businesses may have contributed to what happened?

Q: Evidence that stock prices sometimes fall when a firm announces good news contradicts the efficient market hypothesis.

Q: The elimination of a riskless profit opportunity in a market is called A) the efficient market hypothesis. B) random walk. C) arbitrage. D) market fundamentals.

Q: Assume an audit had been conducted and HBOs financial statements had been declared to be in accordance with GAAP. Would McKesson have been justified in believing that HBOs revenue and profit figures were 100% accurate?

Q: Why do you think McKesson may have been in such a hurry to acquire HBO without completing an appropriate due diligence?

Q: Evidence in favor of market efficiency does not include A) random-walk behavior. B) technical analysis. C) performance of investment analysts and mutual funds. D) the January effect.

Q: Speculate on why Wachovias management rebuffed the offer from SunTrust Banks with the ambiguous statement that it was not in the best interests of Wachovias shareholders?

Q: Evidence against market efficiency does not include A) the small-firm effect. B) technical analysis. C) excessive volatility. D) mean reversion.

Q: Evidence in favor of market efficiency includes A) performance of investment analysts and mutual funds. B) whether stock prices reflect publicly available information. C) the random-walk behavior of stock prices. D) all of the above.

Q: What integration challenges do you believe these two banks will encounter as they attempt to consolidate operations?

Q: An arrangement with a broker to borrow stocks from them and then sell it in the market, with the hope that they earn a profit by buying the stock back again after it has fallen in price is called A) behavioral finance. B) short sales. C) smart money. D) random walk.

Q: How did big banks during the 1990s justify paying lofty premiums for smaller, regional banks? Why do you think their subsequent financial performance was hurt by these acquisitions?

Q: Which of the following is empirical evidence indicating that the efficient market hypothesis may not always be generally applicable? A) Small-firm effect B) January effect C) Market overreaction D) All of the above

Q: Do you believe the cross option and unusual fee structure in this transaction were in the best interests of the Wachovia shareholders? Explain your answer.

Q: Which of the following is an insight from behavioral finance? A) The price of securities fully reflects all available information. B) Investor overconfidence leads to high trading volumes. C) The optimal forecast of a security's return equals the security's equilibrium return. D) Investment advisers cannot consistently beat the market.

Q: In your judgment, was this merger a true merger of equals? Why might this framework have been used in this instance? Do you think it was a fair deal for Wachovia stockholders? Explain your answer.

Q: An investor gains from short selling by ________ and then later ________. A) buying a stock; selling it at a higher price B) selling a stock; buying it back at a lower price C) buying a stock; selling it at a lower price D) selling a stock; buying it back at a higher price

Q: What are the primary barriers to entering the toy industry?

Q: An important lesson from the Black Monday Crash of 1987 and the tech crash of 2000 is that A) factors other than market fundamentals affect stock prices. B) the strong version of the efficient market hypothesis, that stock prices reflect the true fundamental value of securities, is correct. C) market psychology has little if any effect on stock prices. D) there is no such thing as a rational bubble.

Q: How might the internet affect the toy industry? What potential conflicts with customers might be created?

Q: Which of the following does not weaken the efficient markets hypothesis? A) Mean reversion B) Success of buy-and-hold strategy C) January effect D) Excessive volatility

Q: What alternatives to acquisition could Mattel have considered? Discuss the pros and cons of each alternative?

Q: Mean reversion refers to the observation that A) stock prices overact to news announcements. B) stocks prices are more volatile than fluctuations in their fundamental value would predict. C) stocks with low returns are likely to have high returns in the future. D) stocks with low returns are likely to have even lower returns in the future.

Q: Why was Mattel interested in diversification?

Q: The efficient markets hypothesis is weakened by evidence that A) stock prices tend to follow a random walk. B) stock prices are more volatile than fluctuations in their fundamental values can explain. C) technical analysis does not outperform the overall market. D) an investment adviser's past success or failure at picking stocks does not predict his or her future performance.

Q: With substantially higher operating margins than Cingular, what strategies would you expect Verizon Wireless to pursue? Explain your answer.

Q: The small-firm effect refers to the observation that small firms' stocks A) follow a random walk but large firms' stocks do not. B) have earned abnormally low returns given their greater risk. C) have earned abnormally high returns even taking into account their greater risk. D) sell for lower prices than do large firms' stocks.

Q: How might the amount and composition of the purchase price affect Cingulars, SBCs, and BellSouths cost of capital?

Q: According to the January effect, stock prices A) experience an abnormal price rise from December to January. B) experience an abnormal price decline from December to January. C) follow a random walk during January. D) set the pattern for the entire year in January.

Q: What are some of the reasons Cingular used cash rather than stock or some combination to acquire AT&T Wireless? Explain your answer.

Q: The efficient market hypothesis applies to A) both the stock market and the foreign exchange market. B) the stock market but not the foreign exchange market. C) the foreign exchange market but not the stock market. D) neither the stock market nor the foreign exchange market.

Q: What is the total purchase price of the merger?

Q: The efficient market hypothesis suggests that A) investors should purchase no-load mutual funds, which have low management fees. B) investors can use the advice of technical analysts to outperform the market. C) investors let too many unexploited profit opportunities go by if they adopt a "buy and hold" strategy. D) only A and B of the above are sensible strategies.

Q: Conduct an external and internal analysis of Oracle. Briefly describe those factors that influenced the development of Oracles business strategy. Be specific.

Q: Although the verdict is not yet in, the available evidence indicates that, for many purposes, the efficient market hypothesis is A) a good starting point for analyzing expectations. B) not a good starting point for analyzing expectations. C) too general to be a useful tool for analyzing expectations. D) none of the above.

Q: How would you characterize the Oracle business strategy (i.e., cost leadership, differentiation, niche, or some combination of all three)? Explain your answer.

Q: Important implications of the efficient market hypothesis include which of the following? A) Future changes in stock prices should, for all practical purposes, be unpredictable. B) Stock prices will respond to announcements only when the information in these announcements is new. C) Sometimes a stock price declines when good news is announced. D) All of the above. E) Only A and B of the above.

Q: Which of the following is not true of the acquisition process? a. It always follows a predictable sequence of steps. b. It sometimes deviates from the sequence outlined in this chapter. c. It involves a negotiation phase d. It involves the development of a business plan e. None of the above

Q: The financing plan is included in which phase of the acquisition process? a. The development of the business plan b. The negotiation phase c. The integration planning phase d. The development of the acquisition plan e. None of the above

Q: Sometimes one observes that the price of a company's stock falls after the announcement of favorable earnings. This phenomenon is A) clearly inconsistent with the efficient market hypothesis. B) consistent with the efficient market hypothesis if the earnings were not as high as anticipated. C) consistent with the efficient market hypothesis if the earnings were not as low as anticipated. D) the result of none of the above.

Q: The efficient market hypothesis suggests that A) investors should not try to outguess the market by constantly buying and selling securities. B) investors do better on average if they adopt a "buy and hold" strategy. C) buying into a mutual fund is a sensible strategy for a small investor. D) all of the above are sensible strategies. E) only A and B of the above are sensible strategies.

Q: The development of search criteria is included in which of the following activities? a. Development of a business plan b. Development of the acquisition plan c. Post-closing integration d. Post-closing evaluation of the acquisition process e. None of the above

Q: Integration planning is included in which of the following activities? a. Development of a business plan b. The search process c. Development of a financing plan d. Post-closing integration e. None of the above

Q: The advantage of a "buy and hold strategy" is that A) net profits will tend to be higher because there will be fewer brokerage commissions. B) losses will eventually be eliminated. C) the longer a stock is held, the higher its price will be. D) only B and C of the above are true.

Q: Which of the following types of information will most likely enable the exploitation of a profit opportunity? A) Financial analysts' published recommendations B) Technical analysis C) Hot tips from a stockbroker D) None of the above