Exa Business & Finance homework help

Answer one question. Word count is 1000 words

Due in 8 hours


Answer any ONE question


The maximum number of words is 1000 (excluding tables and charts)


ADDITIONAL MATERIAL: None

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BUSI4402E1-22
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Answer ONE question

Each question is worth 100 marks

1.

(a) Up until very recently demand-side determinants of capital structure have dominated empirical research in this area. Explain the two key demand-side determinants of capital structure and the trade-off between them. Use diagrams where appropriate. (25%)

(b) Researchers have argued that supply-side factors also play an important role in determining capital structure. For example, Servaes and Tufano (2006) point out that “Managers often fear that in certain market conditions, credit rationing may occur and they may be unable to raise the amount of debt they need in a timely manner.”

Explain what is meant by the term credit market conditions in this context. (10%)

(c) Describe the state of credit market conditions for UK non-financial firms before, during and after the financial crisis. Use charts to support you answer. (15%)

(d) How has the debt financing landscape changed for large UK firms since the financial crisis? What were the key factors driving this change? Use publicly available data including charts to support your answer. (25%)

(e) What are the benefits to non-financial firms of possessing a credit rating? Provide empirical evidence to support your arguments. (25%)

2.

(a) Explain and discuss the dividend irrelevance theory by Miller and Modigliani (1961)

(20%)

(b) What is the “Home made” dividend in the context of MM theory of dividend policy.

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(c) To what extent do you believe the theory is correct? Explain.

(20%)

(20%)

(d) Shares in Raven Products are selling for £80 per share. There are 1 million shares outstanding. What will be the share price in each of the following situations? Ignore taxes.

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i. The stock split five for four.

ii. The company repurchases 100,000 shares.

(6%)

(6%)

(e) The stock of Wilson Corporation is currently selling for £20 per share. Earnings per share in the coming year are expected to be £2. The required rate of return on the company equity is 15%. This situation is expected to continue indefinitely.

i. How much would the stock price be if all earnings are paid out as dividends and nothing is reinvested? (6%)

(6%)

ii. If the company decides to retain 50% of the earnings in the next year to invest into projects with a return on equity (ROE) of 15%, what would be the stock price?

(6%)

iii. However, if the company finds a new project with a ROE of 20%. The company decides to retain 50% of the earnings in the future years to invest into the projects, what would the stock price be?

(6%)

iv. Discuss the results from questions (i) to (iii) and what implications you can draw from?

(10%)

(Total 100 marks)

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