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1. Suppose that you were a member of Enron's board of directors form 1987 to 2000. Investors such as short-seller James Chanos of Kynikos Associates Ltd. Estimated that Enron's cost of capital was between 9 and 12 percent, but its return on capital was closer to 7 percent. As a director, how would you use information about the cost of capital? As part of your answer, refer to Exhibits 9.1 to 9.3, and think about being a board member in two different time periods, 1987-1994, and 1995-2000.

Next, put yourself in the position of Andy's spouse in the "lemon" parable that describes the nature of Enron CFO Andrew Fastow's use of off-balance sheet partnerships. Suppose that you asked Andy enough problems to ascertain that he had sold his lemon car ot Mike at an inflated price and loaned him the money to do it. As someone concerned about your household's finances, what other problems would you have for Andy?

2. Investment activity is driven by both rational value maximization and behavioral influences on the part of managers. Discuss.

3. In the Camerer and Lovallo experiment, let n = 10 and C = 2. Specify the number of entrants that maximizes industry profit. What will this industry profit be? Specify the number of entrants that minimizes industry profits. What will this industry profit be? What number of entrants leads to zero industry profits?

Basic Finance, Finance

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