What steps must occur before bias can be successfully expunged? Describe the process.
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Imagine that you are a divisional manager.Currently you are a member of a committee which is considering two product investments proposed by two other divisional managers: Joe and John. While walking over to the presentations, Joe seems rather arrogant.
1. He mentions that he golfs with the CEO, is a key player in the firm, and that you could really learn a lot from him. In thinking over the projects after the presentations, you find you are really leaning toward John’s proposal even though the projects are quite similar in terms of estimated cash lows and risks. How can you explain this?
2. Say the level of the market as measured by the Dow Jones Industrial Average is currently at 12,000. A forecaster has made a prediction of 13,300 for the level of the market in one year, along with a 95% confidence interval whose lower bound is 12,500 and whose upper bound is 14,500. You know from experience that this particular forecaster tends to be both excessively optimistic and miscalibrated.
Describe how you might debias this individual. Give a numerical example (making up relevant numbers as appropriate).
3. What steps must occur before bias can be successfully expunged? Describe the process.
4. The fact that risk and uncertainty are experienced differently might matter in times of financial crisis. What are the key differences between risk and uncertainty? Discuss.
5. Ehen valuing a company what is an acceptable range for the estimates by valuation professionals?
6. Should each business unit be valued at its own cost of capital? Explain.
7. Is an input-by-input sensitivity analysis limited? Explain.
8. How can an acquisition create value for the combined entity’s shareholders but not for the acquirer’s shareholders?
9. What are the pros and cons of measuring the success or failure of an acquisition by immediate stock price reactions to its announcement? Who is this approach most likely to provide insights?
10. Describe the circumstance under which the acquirer is better off paying in stock rather than ash. What are the implications for the acquirer’s shareholders paying in stock?