8/4/2019 Mid-Term Exam Revision Notes

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S1_2011 FINM2001 Midterm Exam Revision Notes

Topic 2 Corporate Finance and Theory of Firm (17 points)

1. Business structures, of its characteristics, advantages and disadvantages sole trader,partnerships, corporation

2. Characteristics of a corporation detailed discussion of each feature3. The objective of the company practical questions4. Agency problem what is this problem? Calculating agency costs; direct costs and indirect

costs;

5. How to minimise the agency costs? Extra problems within the solutions6. Typical ways to reduce agency problem detailed discussion7. Conflict of interests between shareholders and bondholders where are the problems?

Detailed discussion; buyout (leverage, management); consequences;

Topic 3 Sources of Finance (14 points)

1. General observations of sources of finance2. Ordinary shares vs. Preference shares

a. Features and characteristicsb. Entitled rights and dividendsc. Sub-classifications of preference shares

3. Debta. Debt vs. Equityb. Maturity structure short & long term all introduced products and featuresc. Currency bonds foreign bonds and Eurobonds featuresd. Fixed and floating interest ratese. Secured and unsecured debtf. Seniority (Senior and subordinated debt)g. Marketable and non-marketable debt

4. Hybrid securities5. Valuation of equity practical questions

a. DCFb. Dividend Growth Modelc. PE ratiod. Dividends and earnings

6. Principal and interest loans (mortgage) practical questionsTopic 4 Dividend Policy (19 points)

1. Dividend policy what is it? General observations of dividends2. Type of dividends

a. Cash dividendsb. Stock dividends why do companies do it?c. Dividend reinvestment plans benefits to company; costs to companyd. Share repurchase different types of share repurchase; why is it a form of dividends

(comparing with cash dividends)? Why do companies repurchase shares?

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3. Institutional features of dividend observations4. Dividend policy

a. A typical trade-offb. Two common forms of dividend policies constant payout percentage or stable

dividends

c. What do companies do in practice?5. Dividend Policy Irrelevance

a. Researchersb. Assumptionsc. Proposition proof procedure!d. Practical questionse. Implications of the irrelevance theory

6. Factors influencing the irrelevance dividend theorya. Taxationthe clientele effectb. Dividend imputation system vs. Classical tax system features practical questionsc. Liquidity needs and transaction costsd. Information asymmetry detailed discussione. Resolution of uncertaintyf. Agency costs

Topic 5 Capital Structure Decision

1. What is capital structure?2. Effects of financial leverage3. Business risk vs. Financial risk detailed discussion4. M & M Analysis

a. Assumptionsb. Proposition 1, 2 and 3 theory; implications; practical questions

5. Factors influencing the propositions detailed discussiona. Taxb. Financial distressc. Information asymmetryd. Agency costse. Proposition 4f. Practical questions SH vs. DH; consequences

6. Pecking order theory detailed discussion and the implications7. The effect of dividend imputation system on capital structure8. More practical questions - appendices