--%>

Investors are irrational or naive

Explain how companies with substandard financial history can draw the attention of investors. Are investors irrational or naive?

E

Expert

Verified

There may be some companies in the world whose performance in the past may not be good due to poor management, poor market condition, increased competition, introduction of substitutes in the market. All these can lead to decrease in revenue and ultimately profits. Now there may be companies whose financial performance has decreased not due to some mismanagement but due to some hard hitting abnormal conditions such as poor market etc.

Investors look out for distressed investments so that they can purchase the stake at low valuations. Investors know which company has good prospects and they can exit such investments at a high valuation at a later stage. They are very smart individuals.

Investors are neither irrational nor naive. They took any investment decisions based on many factors such as future growth of the sector, the competition in the market, how to maximize returns etc. They take decisions after they know that they will get their required Rate of return from the investment. Further, investors are also not naive. It is their hard earned money. They make investments only after they are reasonably sure of a good and profitable exit. They apply various techniques of valuation to evaluate a company before investing in it. They do not invest in a company just by their whim They also have mandate which they have to fulfill.

   Related Questions in Corporate Finance

  • Q : Define the term Stock Market crash

    Stock Market Crash was responsible for the Great Depression. Middle class families lost all their savings as they had gambled the market on margin.Those banks which were under the loan ofbrokers’ started removing money out of the savings account

  • Q : Explain deducing yield curve model

    Explain deducing yield curve model of HJM.

  • Q : Real estate problem Eric Rowan is

    Eric Rowan is planning to buy a house for $155,000 by borrowing money at the rate of 9%. He expects to rent the house for 5 years, collecting $20,000 annual rent in advance each year. He thinks that he can sell the house for $175,000 after five years. Fulton has incom

  • Q : Valuation & Merger analysis Problem

    Problem 21-1 Valuation Harrison Corporation is interested in acquiring Van Buren Corporation. Assume t

  • Q : What are the different types of

    What are the different types of mathematics found in quantitative finance?

  • Q : Which taxes do I have to use for

    Which taxes do I have to utilize when calculating Free Cash Flow (FCF) – is this the medium tax rate or the marginal tax rate of the leveraged company?

  • Q : Problem on financial manager

    Assume that you are a financial manager of Yuen Cheong Manufacturng Company. Due to the rising demand of product X, Yuen Cheong Manufacturng Company decides to open a new production plant in China, so it needs to take a loan of US$1 million. Bank A offers Yuen Cheong

  • Q : DCF Analysis AB Corp. is in the

    AB Corp. is in the business of making white-board markers. They are computing the potential of investing in some new equipment that will enhance their manufacturing process.  The initial cost of the latest machinery is $470,000 plus a one-time installation cost o

  • Q : Problem on EBIT ABC Corporation stock

    ABC Corporation stock sells at $27 per share and its dividend per share is $1.20. ABC has price-earnings ratio of 16. The company contains $40 million worth of bonds, selling at par, with 8.5% coupon. The EBIT of ABC is of $12 million and its tax rate is 30%. Calculat

  • Q : Problem on annual obligation payment

    ABC Corp. has a challenge: The CEO wants to set aside annual, end of year payments into a sinking fund account earning 5% over the next 6 years in order to retire $25 million in bonds that will be outstanding at that time. Determine the annual payment required each ye