Chapter 12 - Cost of Capital
WACC
BETA
What is it?
What are its determinants?
What are the problems when calculating the beta of a company?
What is it and how do you calculate it?
How can you reduce it?
Relate liquidity & WACC
Chapter : 14
Shareholders & Dividends
Are dividends a form of business expense? Explain.
List three important characteristics of dividends.
List four rights of shareholders.
Shares & Equity Statements
What is the total par value (dedicated or called-up capital) and how is it calculated?
What is the additional paid in capital?
Define ordinary shares.
What is adverse selection?
What is the formula for book value per share?
Examples of trading costs & how to reduce them
What are preference shares?
A good case can be made that preference shares are debt in disguise. Make that case.
EVA
Dividends on preference shares can be either cumulative or non-cumulative. What does this mean?
How do you calculate it?
What are the advantages?
Debt and Equity
What are the problems with it?
List four different types of debt securities. Which ones are secured and which ones are not?
What is amortisation?
List three differences between equity and debt from a financial point of view.
Define systematic & unsystematic risk
Give examples of firms with high/low betas
What is hurdle rate?
What is a sinking fund?
What is the call price?
What does the term seniority refer to?
What is an indenture, and what does it include?
Chapter 15 - Capital Strucutre
MM Propositions (no taxes)
Financing Options
List the three primary financing options.
What is the difference between variability and cyclicality?
How is the debt ratio calculated?
How does adverse selection relate to liquidity?
Book or market values: which are best? And why?
In case of bankruptcy, the firm's assets will be sold to return the initial investment to security holders. Give the hierarchy that determines who is paid first.
Define homemade leverage
Explain MM I
What is the main assumption of MMI
Chapter: 16
What does it say about share price & WACC
Financial Distress Costs
What was previously assumed under MM Propositions with taxes (to do with level of debt).
What are the indirect costs of bankruptcy? (3)
What are the direct costs of bankruptcy? (2)
How do you compute the promised return on debt?
What reduces the value of a firm: bankruptcy risk or costs?
Agency Costs of Debt
When do agency costs of debt arise and what are they?
What are the three selfish strategies pursued by managers? List and explain.
Who actually bears the costs of these selfish strategies?
Reducing the Costs of Debt
List 2 different ways to reduce the costs of debt.
List at least three examples of positive covenants.
List at least three examples of negative covenants.
Theories to determine Leverage Level
Static or Trade-Off Theory
Pecking Order Theory
Market Timing Theory
MM Propositions (with taxes)
Define tax shield
Explain MM I
What is the tradeoff in this theory?
Explain MM II
What happens to the WACC according to this theory?
What happens to the levered firm?
Define marketable and non-marketable claims.
What are the 2 unrealistic assumptions about these propositions
Debt Signalling
What happens to the share price if debt is increased?
What is the information content effect?
What happens to share price & WACC
What does increased level of debt signal?
Explain MM II
Agency Costs of Equity
How can firm change their debt levels (exchange offers)? What happens to the share price in each of the two scenarios?
What is the incentive to shirk?
What happens to the work of managers if more equity is issued (more shareholders)?
List three bad things managers with less ownership do?
What are some of the assumptions for these propositions?
List two ways how these costs can be reduced.
Free Cash Flow Hypothesis
What does this hypothesis state?
Why shouldn't a company be 100% debt financed?
Will a shift from debt to equity boost or reduce firm value?
How can the free cash flow be reduced. Give two different ideas.
Chapter 18 - Dividend Policy
Definitions
Hurdle rate
Dividend
Declaration date
Exdividend
MM Proposition III (aka Irrelevance Theory)
Define homemade dividends
Explain
Paying out dividends
What does this theory state? What are the two rules?
When will a firm want to issue equity?
When will a firm want to issue debt?
List three assumptions this makes (at odds with static theory).
Which factors determine capital structure?
A high market to book value suggests to raise ...
A low market to book value suggests to raise ...
Factors Affecting Debt Equity Ratios
List the three factors that determine the debt to equity ratio.
Share Repurchases
List 3 ways firm can repurchases shares
List 5 reasons to repurchase shares instead of paying out dvidends
List the advantages (5)
List the disadvantages (3)
List 4 other alternatives to dividends
Schools of thoughts
Clientele effect
Catering theory of dividends
Excess cash hypothesis
Signalling hypothesis
Stock split
Explain Dividend smoothing
Reverse split
Residual Dividend Policy
Why do we still have dividends?
How do you determine the size of the dividend payout?
What is the tradeoff of paying higher dividends today?
Assumptions of proposition