FIN 6100 EXAM 2 ALL ANSWERS AND QUESTIONS
SET A+
✔✔What did the Miller and Madigliani 1 & 2 papers say? - ✔✔Paper 1: assets are
valuable to investors, not how you pay for those assets. (debt vs. equity
financing/capital structure)
Paper 2: responded to critics of paper 1. showed that given the same assumptions,
WACC would remain unchanged. when debt increases, equity decreases and vis versa
✔✔Unlevered vs levered beta - ✔✔unlevered (asset) Beta: financed by equity. measure
of market risk
Levered (equity) Beta: reflected company's equity, taking impact of debt into account.
✔✔What are the 3 theories of capital structure? - ✔✔1. Pecking Order theory
2. Trade-off theory
3. Agency theory
✔✔What is the pecking order theory?
3 sources? - ✔✔companies will finance through the cheapest sources first.
1. internal funds/retained earnings
2. debt
3. equity
✔✔What is the trade-off theory? - ✔✔Fims take on debt until the marginal benefit
equals the marginal cost from the increase in financial distress.
firms with higher tax rates benefit more due to tax shields.
✔✔What is the Agency Cost Theory? - ✔✔companies don't always make the right or
best decisions. Not always value adding.
, ✔✔What are 3 reasons companies may misuse funds according to the agency cost
theory? - ✔✔1. miscalculation of WACC
2. empire building
3. private benefits
✔✔Is there an optimal capital structure? - ✔✔no. more like a comfortable range.
the inputs change constantly.
✔✔can debt increase the a company's returns? - ✔✔yes
✔✔how is wealth paid to shareholders? (3) - ✔✔1. liquidation
2. capital gains
3. distribute through dividends or repurchases
✔✔Life cycle of a dividend - 4 important dates - ✔✔1. declaration date: announce
dividend.
2. ex-dividend date: 2 days before date of record. must buy any stock before this to be
included in the payout.
3. Date of record: list of who the shareholders are and who will be paid.
4. payment date: paid
✔✔3 types of stock repurchases - ✔✔1. open market
2. tender offer
3. targeted
✔✔what is an open market repurchase? - ✔✔firm announces intention to buy back a
certain # or $ of shares.
flexible and relaxed. buy when low.
✔✔what is a tender offer repurchase? - ✔✔company states they will buy a certain
number of shares, at a fixed price, on a fixed date.
binding. strong signal.
✔✔what is a targeted repurchase? - ✔✔buy back shares of only specific shareholders.
Greenmail
✔✔What signal is sent with these actions?
SET A+
✔✔What did the Miller and Madigliani 1 & 2 papers say? - ✔✔Paper 1: assets are
valuable to investors, not how you pay for those assets. (debt vs. equity
financing/capital structure)
Paper 2: responded to critics of paper 1. showed that given the same assumptions,
WACC would remain unchanged. when debt increases, equity decreases and vis versa
✔✔Unlevered vs levered beta - ✔✔unlevered (asset) Beta: financed by equity. measure
of market risk
Levered (equity) Beta: reflected company's equity, taking impact of debt into account.
✔✔What are the 3 theories of capital structure? - ✔✔1. Pecking Order theory
2. Trade-off theory
3. Agency theory
✔✔What is the pecking order theory?
3 sources? - ✔✔companies will finance through the cheapest sources first.
1. internal funds/retained earnings
2. debt
3. equity
✔✔What is the trade-off theory? - ✔✔Fims take on debt until the marginal benefit
equals the marginal cost from the increase in financial distress.
firms with higher tax rates benefit more due to tax shields.
✔✔What is the Agency Cost Theory? - ✔✔companies don't always make the right or
best decisions. Not always value adding.
, ✔✔What are 3 reasons companies may misuse funds according to the agency cost
theory? - ✔✔1. miscalculation of WACC
2. empire building
3. private benefits
✔✔Is there an optimal capital structure? - ✔✔no. more like a comfortable range.
the inputs change constantly.
✔✔can debt increase the a company's returns? - ✔✔yes
✔✔how is wealth paid to shareholders? (3) - ✔✔1. liquidation
2. capital gains
3. distribute through dividends or repurchases
✔✔Life cycle of a dividend - 4 important dates - ✔✔1. declaration date: announce
dividend.
2. ex-dividend date: 2 days before date of record. must buy any stock before this to be
included in the payout.
3. Date of record: list of who the shareholders are and who will be paid.
4. payment date: paid
✔✔3 types of stock repurchases - ✔✔1. open market
2. tender offer
3. targeted
✔✔what is an open market repurchase? - ✔✔firm announces intention to buy back a
certain # or $ of shares.
flexible and relaxed. buy when low.
✔✔what is a tender offer repurchase? - ✔✔company states they will buy a certain
number of shares, at a fixed price, on a fixed date.
binding. strong signal.
✔✔what is a targeted repurchase? - ✔✔buy back shares of only specific shareholders.
Greenmail
✔✔What signal is sent with these actions?
