BUS 413 Final Questions With Complete Solutions
Agency cost Correct Answers investor prefers to get dividends
because it limits a managers ability to act outside of the
shareholders best interests.
Agency costs to creditors when a firm goes bankrupt Correct
Answers selfish strategy 1: bet on npv negative projects, which
increase shareholder expected value but screw creditors
selfish strategy 2: under-invest in npv positive projects because
more s/h funding would be needed
selfish strategy 3: pay dividend while ship sinking. or managers
steal furniture and cash creditors would get from liquidation
Beta levered Correct Answers (1 + B/Sl x (1 - t)) x Beta
unlevered
bird in hand theory Correct Answers prefer a dividend now
rather than an uncertain capital gain in the future
CFs for lease minus buy (leasee POV) Correct Answers t0: +
value of machine
t1: - lease payments x (1 - t) - D&A x t
Clientele effect Correct Answers give dividends based on what
makes your shareholders happy
- know who owns your shares
- once company matches policy to s/h, do not change it around
, contributed surples Correct Answers comes from stocks selling
above par value (certificate price) when issuing
Convertible bond Correct Answers Bond holder can trade in
bond for stock (has a built in call option), dilutes.
Cum - Dividend date Correct Answers last chance to buy shares
and get the dividend
debenturedebt Correct Answers long-term unsecured form of
debt
short-term would be note
Declaration date Correct Answers dividend announced
Ex - Dividend date Correct Answers if sell stock *after* this
date still get the dividend
Factors determining the optimal debt to equity ratio Correct
Answers pie theory - grow the pie for both B and S. minimize
WACC.
Factors:
1. tax - levered firm pays less tax
2. cost of financial distress - bankruptcy chance reduces value
3. pecking order - companies prefer to issue debt over equity
FCF hypothesis and agency cost of equity Correct Answers 1.
increasing dividend good for s/h because reduces funds manager
has to be wasteful with
Agency cost Correct Answers investor prefers to get dividends
because it limits a managers ability to act outside of the
shareholders best interests.
Agency costs to creditors when a firm goes bankrupt Correct
Answers selfish strategy 1: bet on npv negative projects, which
increase shareholder expected value but screw creditors
selfish strategy 2: under-invest in npv positive projects because
more s/h funding would be needed
selfish strategy 3: pay dividend while ship sinking. or managers
steal furniture and cash creditors would get from liquidation
Beta levered Correct Answers (1 + B/Sl x (1 - t)) x Beta
unlevered
bird in hand theory Correct Answers prefer a dividend now
rather than an uncertain capital gain in the future
CFs for lease minus buy (leasee POV) Correct Answers t0: +
value of machine
t1: - lease payments x (1 - t) - D&A x t
Clientele effect Correct Answers give dividends based on what
makes your shareholders happy
- know who owns your shares
- once company matches policy to s/h, do not change it around
, contributed surples Correct Answers comes from stocks selling
above par value (certificate price) when issuing
Convertible bond Correct Answers Bond holder can trade in
bond for stock (has a built in call option), dilutes.
Cum - Dividend date Correct Answers last chance to buy shares
and get the dividend
debenturedebt Correct Answers long-term unsecured form of
debt
short-term would be note
Declaration date Correct Answers dividend announced
Ex - Dividend date Correct Answers if sell stock *after* this
date still get the dividend
Factors determining the optimal debt to equity ratio Correct
Answers pie theory - grow the pie for both B and S. minimize
WACC.
Factors:
1. tax - levered firm pays less tax
2. cost of financial distress - bankruptcy chance reduces value
3. pecking order - companies prefer to issue debt over equity
FCF hypothesis and agency cost of equity Correct Answers 1.
increasing dividend good for s/h because reduces funds manager
has to be wasteful with
