Behavioral Corporate Finance 2nd Edition Shefrin Solutions Manual

Chapter 02 - Introduction to Behavioral Analysis

Behavioral Corporate Finance 2nd Edition Shefrin

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CHAPTER 2
Introduction to Behavioral Analysis

1. The Behavioral Pitfalls box on page 36, which discusses the actions of Scott McNealy

included the following passage.

On March 8, 2001, Cisco announced that because the downturn looked like it would

last much longer than expected, it was going to lay off 18 percent of its workforce.

Some of Sun’s executives wanted to follow suit. One stated: “When times are hard,

you’ve got to shoot activities that aren’t making money.” However, McNealy refused

to do so.

Refusing to shoot activities that are not making money is evidence of being averse to a sure

loss.

2. The situations are similar. During the late 1990s, both Sun and Merck were highly

profitable firms whose market values were well in excess of their book values. The assets of

both firms had large components that were intangible, residing in research and development.

At the same time, both firms did have tangible assets, and could have held more long-term

debt, thereby shielding some of their income from taxes. Both firms appear to have chosen to

1
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Chapter 02 - Introduction to Behavioral Analysis
hold less debt than was optimal, thereby paying more corporate income tax than was

necessary.

2
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reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
Chapter 02 - Introduction to Behavioral Analysis

3. The valuation metric McNealy mentions is price-to-sales. His comment that Sun had

monetized the valuation very well during this period is suggestive of catering or market

timing behavior, presumably involving the issue of new shares at the time to exploit the

overvaluation.

4. McNealy commented that he might have hired a chief operating officer during his tenure

as CEO, rather than undertaking the responsibility himself, at a time in his life when he had

four children with whom he also wanted to spend his time, and did. The comments suggests

that he was overconfident about his ability, and experiencing the illusion of control, in

judging that he could simultaneously be chairman, CEO, and COO at a time when Sun was

experiencing major challenges in the wake of the collapse of the dot.com bubble, and when

he was also preoccupied with family matters.

5. Sun’s net income and cash position did increase substantially during 2000, but this is not

the same as monetization stemming from having an overvalued stock. According to Sun

Microsystem’s Statement of Cash Flows, between 1998 and 2001, the dot.com bubble era,

Sun spent more repurchasing shares than issuing new shares. Adjusting for stock splits, the

total number of its shares outstanding increased intermittently, usually at the end of a quarter,

by 1 or 2 percent. Therefore, the evidence does not support Sun engaging in market timing by

issuing new shares. A summary of key financial statement variables appears below. Note that

large increases in number of shares reflect stock splits.

3
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 Another random document
un-related content on Scribd:
 ——:o:——
William had a big gingham,
Its folds were strong and broad;
And everywhere that William came
That gingham too abode.

Lord Rosey put it up one day,

And many sheltered there;
It made the Tories laugh and play
To see the huge affair.

To shut it up their leaders tried,

But still its folds are spread,
And ’neath them Libs and Rads abide
Around their Grand Old Head.

“Why do they all love William so?”

The jealous Tories cry.
“Because he trusteth us you know,”
The people loud reply.
S .
Truth. October 15, 1885.
Mary had a little corn
Upon her little toe,
And everywhere that Mary went
The corn was sure to go.

But Mary bought an Alcock’s shield,

And stuck it on her toe;
And then she ran about alone,
For the corn soon had to go.

And Mary, grown up, tells the tale,

Of that time, long ago,
When she was little Mary with
That corn upon her toe.
 Mary had a little lamb,
With coat as black as soot,
And into Mary’s cup of milk
It put its dirty foot.
Now Mary, a straightforward girl,
Who hated any sham,
Rapped out a naughty little word
That rhymed with Mary’s lamb.
H .
Truth. September 30, 1886.
 Mary had a pot of jam
Presented by the cook,
And everywhere that Mary went,
The luscious jar she took.

She carried it to school one day,

Which was against the rule;
And when the teacher looked away,
She ate the jam in school.

At last the teacher found her out,

And, oh! was most severe:
But what the imposition was
It doth not well appear.

Now Mary soon began to roll

Her head upon her arm,
And felt dismayed, and much afraid
The jam had done her harm.

“Oh! why does Mary’s head ache so”

The curious children cry,
“Quaejam est, ea sic erit,”
The teacher did reply.
C. W. G.
Newcastle Weekly Chronicle. 1887.
 J J .
An Adaptation of “Mary had a Little Lamb,” said to
have been Sung during the Ayr Contest, in which
Mr. Collings took an active part.
Joseph had a little lamb—a little lamb—
Joseph had a little lamb,
Which loved its master so,
That everywhere that Joseph went—that Joseph went—
That everywhere that Joseph went,
The lamb was sure to go.

It followed him so close about—so close about—

It followed him so close about,
To every place you know,
It made the people laugh and shout—laugh and shout—
It made the people laugh and shout,
To see the lamb and Joe.

And when the laborers turned it out—turned it out—

And when the laborers turned it out,
Yet still it lingered near,
And wandered helplessly about—helplessly about—
And wandered helplessly about,
Till Joseph did appear.

“What makes the lamb love Joseph so—love Joseph so—

What makes the lamb love Joseph so?”
The “Rural Laborers” cry,
“Why Joseph loves the lamb, you know—the lamb, you know”—
Why Joseph loves the lamb—you know,
And Jesse makes reply, Baa! Baa!
The Star. June 18, 1888.
 Mary had a cactus plant
So modestly it grew,
Shooting its little fibers out
It lived upon the dew.

Her little brother often heard

Her say it lived on air,
And so he pulled it up one day
And placed it in a chair.

Placed it in a chair he did,

Then laughed with ghoulish glee—
Placed it in the old arm chair
Under the trysting tree.

Nor thought of Mary’s lover,

Who called each night to woo,
Or even dreamed they’d take a stroll,
As lovers often do.

The eve drew on. The lover came.

They sought the trysting tree,
Where has the little cactus gone?
The lover—where is he!

——:o:——

SONG.
A .—“If I had a donkey vot vouldn’t go,
Do you think I’d wallop, &c.”

Had I an ass averse to speed,

Deem’st thou I’d strike him? No, indeed
Mark me, I’d try persuasion’s art,
For cruelty offends my heart:
Had all resembled me, I ween,
Martin, thy law had needless been
Of speechless brutes from blows to screen
The poor head;
For had I an ass averse to speed
I ne’er would strike him; no indeed!
I’d give him hay, and cry, “Proceed,”
And “Go on, Edward!”

Why speak I thus? This very morn,

I saw that cruel William Burn,
Whilst crying “Greens!” upon his course,
Assail his ass with all his force;
He smote him o’er the head and thighs,
Till tears bedimm’d the creature’s eyes!
Oh! ’twas too much. My blood ’gan rise,
And I exclaim’d,
“Had I an” &c.

Burn turn’d and cried, with scornful eye,

“Perchance thou’rt one of Martin’s fry,
And seek’st occasion base to take,
The vile informer’s gain to make.”
Word of denial though I spoke,
Full on my brow his fury broke,
And thus, while I return’d the stroke,
I exclaim’d,
“Had I an” &c.

To us, infringing thus the peace,

Approach’d its guardians—the police;
And, like inevitable Fate,
Bore us to where stern Justice sate:
Her minister the tale I told,
And to support my word, made bold
To crave he would the ass behold:
“For,” I declared,
“Had I an” &c.
 They call’d the creature into court,
Where, sooth to say, he made some sport,
With ears erect, and parted jaws,
As though he strove to plead his cause:
I gain’d the palm of feelings kind;
The ass was righted; William fined.
For Justice, one with me in mind,
Exclaim’d, by her Minister,
“Had I an” &c.

Cried William to his Judge, “’Tis hard

(Think not the fine that I regard),
But things have reach’d a goodly pass—
One may not beat a stubborn ass!”
Nought spoke the Judge, but closed his book;
So William thence the creature took,
Eyeing me—ah! with what a look,
As gently whispering in his ear, I said,
“William, had I an,” &c.
Punch. February 17, 1844.
 T C C .
(A propos of Jumbo.)
If I owned Jumbó,
(Who declines to go)
Would I sell him to a show?
No, no, not I!
When the Titan I saw
Firmly plant his paw,
I would shout “Hooraw!”
For his bra-ve-ry.
Chorus.
If an army of Yankees should proffer their pay,
I’d button my pockets, and send them away.
* * * * *

Punch. March 4, 1884.

 O L G .
What are you doing, my pretty maid?
I’m mashing a lord, kind sir, she said.
Then pray be careful, my pretty maid;
I’m more than seven, sir, she said.
What is his father, my pretty maid?
His father’s a lawyer, sir, she said.
Say, has he married you, my pretty maid?
No, an it please you, kind sir, she said.
What will you do then, my pretty maid?
I’ll sue on his promise, sir, she said.
Then has he a fortune, my pretty maid!
He’s got one—at present—sir, she said.
P .
The Weekly Dispatch. April 13, 1884.
 There was an old statesman,
And what do you think?
He used mountains of paper,
And oceans of ink,
And even on postcards would issue his fiat,
And yet this great statesman
Could never rest quiet.
A F .
Truth. June 14, 1888.
——:o:——
T L O .
[“The capacity of our Legislative Organ is limited. Its strength is
overtaxed. In its perspective, the first place is held by the great and urgent
Irish question. Still more limited are the means, especially as to the future,
possessed by a man on the margin of his eightieth year.”—Mr. Gladstone’s
letter.]
Seated long since at the organ,
I strummed in my weary way;
And my fancies wandered widely
For a popular air to play.
I know not what I was doing,
(And I cannot explain it still),
But I struck one chord of faction;
Like the sound of a Home Rule Bill.

It startled the House and the Empire,

With a fantasy wild and new;
And it shattered a mighty party
Like a thunderbolt from the blue.
And I struggled and “reconstructed,”
But passions I could not cool;
So I gave up my seat at the organ,
Where I might not play “Home Rule.”
 Yet still on that worn-out Organ
I shall strike those chords once more;
And sing in life’s sunless gloaming,
The song that I learnt of yore;
And the Law of the Land shall quaver
In tune to a plundering Plan,
When the grand Old English Organ
Shall throb to the Grand Old Man.
The St. James’s Gazette. 1889.

——:o:——
A U P U .
This poem, inserted on page 81, was disfigured by a misprint, the third
line should have read:—
“And drapen in tear-colour’d minivers.”
The author (Dr. Todhunter) wishes it to be understood that the poem was
intended as a skit on the imitators of Mr. Swinburne’s style in general, and
not on any particular individual. It was therefore a little out of place
amongst the Parodies of Mr. Oscar Wilde, as it was not intended to refer in
any way to the writings of that gentleman.—E . Parodies.
——:o:——
 PARODIES & POEMS
IN

PRAISE OF TOBACCO.

following poems, devoted entirely to the

laudation of Tobacco, either as smoked in the
pipe, cigar, or cigarette, or as taken in the form
of snuff, have been collected from many
different works. One of the principal sources of
information has been that entertaining journal
Cope’s Tobacco Plant, which has now
unfortunately ceased to exist. Another useful
authority was a little book published at the
office of Tobacco in Gracechurch Street,
London, entitled Tobacco Jokes for Smoking Folks, which contained many
amusing anecdotes, and humorous illustrations. A few of the latter are here
inserted by the kind permission of the proprietors. Following the Parodies
some of the most noted Poems on Tobacco are given, so as to make the
collection on this interesting topic more complete.
 One of the earliest burlesque poems in praise of Tobacco was that
written by Mr. Isaac Hawkins Browne about one hundred and fifty years
ago, entitled “A Pipe of Tobacco, in imitation of Six Several Authors.”
This poem has been repeatedly reprinted, although there is little in it that
strikes a modern reader as either remarkably humorous or clever. The
authors imitated are Colley Cibber (the Poet Laureate), Ambrose Phillips,
James Thomson, Edward Young, Alexander Pope, and Jonathan Swift,
Dean of St. Patrick’s. It is stated that the imitation of Ambrose Phillips was
not written by Mr. I. H. Browne, but was sent to him by a friend, whose
name has not been transmitted to us. This is to be regretted, as this
particular imitation (the second) is generally considered the best in the
collection. According to Ritson this was written for the collection by Dr.
John Hoadley.

A PIPE OF TOBACCO:
In Imitation of Six Several Authors.
I I.
Laudes egregii Cæsaris——
Culpâ deterere ingenî.
H .
A N -Y ’ O .
 Recitative.
Old battle-array, big with horror is fled,
And olive-robed peace again lifts up her head.
Sing, ye Muses, Tobacco, the blessing of peace;
Was ever a nation so blessed as this?
Air.
When summer suns grow red with heat,
Tobacco tempers Phœbus’ ire,
When wintry storms around us beat,
Tobacco cheers with gentle fire.
Yellow autumn, youthful spring,
In thy praises jointly sing.
Recitativo.
Like Neptune, Cæsar guards Virginian fleets,
Fraught with Tobacco’s balmy sweets;
Old Ocean trembles at Britannia’s pow’r,
And Boreas is afraid to roar.
Air.
Happy mortal! he who knows
Pleasure which a Pipe bestows;
Curling eddies climb the room,
Wafting round a mild perfume.
Recitativo.
Let foreign climes the vine and orange boast,
While wastes of war deform the teeming coast;
Britannia, distant from each hostile sound,
Enjoys a Pipe, with ease and freedom crown’d;
E’en restless Faction finds itself most free,
Or if a slave, a slave to Liberty.
Air.
Smiling years that gayly run,
Round the Zodiack with the sun,
Tell, if ever you have seen
Realms so quiet and serene.
Britain’s sons no longer now
Hurl the bar, or twang the bow,
Nor of crimson combat think,
But securely smoke and drink.
Chorus.
Smiling years that gayly run
Round the Zodiack with the sun,
Tell, if ever you have seen
Realms so quiet and serene.
 I II.
Tenues fugit ceu fumus in auras.
V .

Little tube of mighty pow’r,

Charmer of an idle hour,
Object of my warm desire,
Lip of wax, and eye of fire:
And thy snowy taper waist,
With my finger gently brac’d;
And thy pretty swelling crest,
With my little stopper prest,
And the sweetest bliss of blisses,
Breathing from thy balmy kisses.
Happy thrice, and thrice agen,
Happiest he of happy men;
Who when agen the night returns,
When agen the taper burns;
When agen the cricket’s gay,
(Little cricket, full of play)
Can afford his tube to feed
With the fragrant Indian weed:
Pleasure for a nose divine,
Incense of the god of wine.
Happy thrice, and thrice agen,
Happiest he of happy men.
 I III.
——Prorumpit ad æthera nubem
Turbine fumantem piceo.
V .
O thou, matur’d by glad Hesperian suns,
Tobacco, fountain pure of limpid[16] truth,
That looks the very soul; whence pouring thought
Swarms all the mind; absorpt is yellow care,
And[17] at each puff imagination burns.
Flash on thy bard, and with exalting fires
Touch the mysterious lip, that chaunts thy praise
In strains to mortal sons of earth unknown.
Behold an engine, wrought from tawny mines
Of ductile clay, with plastic[18] virtue form’d,
And glaz’d magnifick o’er, I grasp, I fill.
From Pætotheke[19] with pungent pow’rs perfum’d,
Itself[20] one tortoise all, where shines imbib’d
Each parent ray; then rudely ram’d illume,
With the red touch of zeal-enkindling sheet,
Mark’d[21] with Gibsonian lore; forth issue clouds,
Thought-thrilling, thirst-inciting clouds around,
And many-mining fires: I all the while,
Lolling at ease, inhale[22] the breezy balm.
But chief, when Bacchus wont with thee to join
In genial strife and orthodoxal ale,
Stream[23] life and joy into the Muses’ bowl.
Oh be thou still my great inspirer, thou
My Muse; oh fan me with thy zephyrs boon,
While I, in clouded tabernacle shrin’d,
Burst forth all oracle and mystick song.
 I IV.
——Bullatis mihi nugis,
Pagina turgescat, dare pondus idonea fumo.
P .
Criticks avaunt; Tobacco is my theme;
Tremble like hornets at the blasting steam.
And you, court-insects, flutter not too near
Its light, nor buzz within the scorching sphere.
Pollio, with flame like thine, my verse inspire,
So shall the Muse from smoke elicit fire.
Coxcombs prefer the tickling sting of snuff;
Yet all their claim to wisdom is—a puff:
Lord Fopling smokes not—for his teeth afraid:
Sir Tawdry smokes not—for he wears brocade.
Ladies, when pipes are brought, affect to swoon;
They love no smoke, except the smoke of town;
But courtiers hate the puffing tribe,—no matter,
Strange if they love the breath that cannot flatter!
Its foes but shew their ignorance; can he
Who scorns the leaf of knowledge, love the tree?
The tainted templar (more prodigious yet)
Rails at Tobacco, tho’ it makes him—spit.
Citronia vows it has an odious stink;
She will not smoke (ye gods!) but she will drink:
And chaste Prudella (blame her if you can)
Says, pipes are us’d by that vile creature Man:
Yet crowds remain, who still its worth proclaim,
While some for pleasure smoke, and some for fame:
Fame, of our actions universal spring,
For which we drink, eat, sleep, smoke,—ev’rything.
 I V.
——Solis ad ortus
Vanescit fumus.
L .

Blest leaf! whose aromatick gales dispense

To templars modesty, to parsons sense:
So raptur’d priests, at fam’d Dodona’s shrine
Drank inspiration from the steam divine.
Poison that cures, a vapour that affords
Content, more solid than the smile of lords:
Rest to the weary, to the hungry food,
The last kind refuge of the wise and good.
Inspir’d by thee, dull cits adjust the scale
Of Europe’s peace, when other statesmen fail.
By thee protected, and thy sister, beer,
Poets rejoice, nor think the bailiff near.
Nor less the critick owns thy genial aid,
While supperless he plies the piddling trade.
What tho’ to love and soft delights a foe,
By ladies hated, hated by the beau,
Yet social freedom, long to courts unknown,
Fair health, fair truth, and virtue are thy own.
Come to thy poet, come with healing wings,
And let me taste thee unexcis’d by kings.