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Foundations of International Corporate Finance, ACCFIN5203

Question 1

Is the efficient market hypothesis still valid? Critically discuss this question. [In your discussion you should make reference to the various theories of the EMH debate]

(33⅓%)

2.1 What does it mean to say that dividends are "irrelevant" in a world without taxes or other market frictions?

(10%)

2.2 What does it mean to say that corporate managers “smooth” cash dividend payments?

(10%)

2.3 What do you think is the typical stock market reaction to the announcement that a firm will increase its dividend payment? Why?

(13⅓%)

(Total 33⅓ %)

Question 3

You are evaluating a project that will cost $500,000 but is expected to produce cash flows of $125,000 per year for 10 years, with the first cash flow in one year. Your cost of capital is 11% and your company preferred payback period is 3 years or less.

3.1 What is the payback period of this project?

(10%)

3.2 Should you take the project if you want to increase the value of the company?

(10%)

3.3 Explain why the NPV rule is the most accurate and reliable investment decision rule.

(13⅓%)

(Total 33⅓%)

Question 4

‘Debt policy does not matter in the real world’

Critically discuss the above statement [In your discussion you should make reference to the various theories of the capital structure debate including the propositions of Modigliani and Miller (1958) and how taxes impact on the capital structure debate]

(33⅓%)