FIN7026-Advanced Corporate Finance Analyses – Accounting & Finance Assignment Help

Assignment Task


Advanced Corporate Finance 

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Module Learning Outcomes and pass level attainment:

On successful completion of the module, you should be able to: 
1 Understand and apply a variety of concepts of advanced corporate finance and corporate governance including ethical standards.
2 Use appropriate theoretical concepts and tools of corporate finance to solve firm’s financial problems using different techniques and computer software.
3 Critically assess the differences in corporate finance practices and strategies around the world.
4 Develop a corporate financial strategy to enhance shareholders’ wealth.

Section A:  Answer any 6 of the following 8 question. 
Make sure you all answer all parts of the question.             

Q1) Discuss the implications a higher debt to equity ratio on a firm’s WACC? Consider both debt and equity?                    

Q2) Explain MM’s trade off theory and its relevance in determining the capital structure? Illustrate with an example of a (real life) firm?        
Q3) Determine the PV of a bond with face value of £100, coupon rate of 8%, YTM of 5%. The bond has been recently issued and will be redeemed in 5 years?                

Q4) Explain what is a credit spread? How do credit spreads affect bond yield during times of boom and recessions?                    
Q5) A company is considering investment opportunities. In all cases, the projects would terminate after two years. The after-tax cash flows of the projects are as follows (numbers in £s) Using a discount rate of 10%, estimate the Net Present Value for each project. According to NPV rule which project(s) should be undertaken? If the projects are mutually exclusive which project will be chosen? Calculate the profitability index for each project? Based on profitability index, which project should be chosen?                                     

Q6) What is pecking order theory? Why is Debt often more preferred to issuing equity. Discuss three possible reason for this.                
Q7) Describe the dividend irrelevance theory. Provide two examples of empirical evidence that are not consistent with this theory and explain your arguments. Provide your own reasoning and use data from existing literature. Provide references.                        

Q8) Discuss the key differences between traditional finance and behavioral finance? Describe 3 type of behavioral biases with examples that may lead an investor to make ‘’sub-optimal’’ investment choices in view of traditional finance?     

Section B:  Attempt all questions.

Question 1: 

Mr. Smith is a high net worth individual who holds a portfolio of stock worth £1 million. Prior to the Covid-19 pandemic, he pursued an aggressive trading and was normally able to outperform the market, net of transaction cost. However, the looming uncertainty of another lockdown has made him change his investment stance. He is happy to earn a return closely in-line with the market return and minimise transaction cost.

a) Describe what type of stock market investment strategy is Mr. Smith likely to adopt?     

b) Explain what is stock beta and its relevance to risk premium?                

c) Describe the Beta strategies in portfolio construction and which one is Mr. Smith likely to employ? 
Since the beginning of the pandemic, Mr. Smith has sold all his stock holding in different companies around the globe and used the receipts to buy back shares of his own company (a 5-star travel agency) that he established during his career. He has also regained controlling interest of the firm and has secured a place on the board of directors. He is determined to make the company survive through the pandemic even though it has been making losses due to travel restrictions.

d) Suggest 3 cognitive and 3 emotional behavioural biases that may be displaying and its potential impact on his portfolio?                                    

Question 2:

a) Suppose an investor hold his entire portfolio of equities in stock A. The following table shows the observed risk and return of stock A and the market index. Calculate stock A’s Beta? 

b) Using your answer from a; Calculate the correlation of stock A with market return?    

c) Comment on the correlation coefficient of stock A?

d) The investor has just read an article about risk associated with stock investments. He expects markets to perform strongly over the next few months and wishes to enhance his portfolio return by increasing his exposure to systematic risk. Which stock should he add to his portfolio of stock A to achieve this? Calculate the new portfolio beta assuming he now holds 60% stock A and 40% of the new stock?

e) Using the CAPM model, what is the expected return of the new portfolio if the risk free rate is 1.5% and market return is 5%?             

h) Plot the new portfolio on Security Market line?                     

g) Choose any point of portfolio total return and show the break down of return due to systematic and unsystematic risk?    
Hint: suppose that the actual return on this portfolio is 7.5%, how do you explain this on SML?    

Section C : Attempt one of the two questions.

Question 1:
Download the the excel file ‘Yahoo 2012’ to answer the following questions.

a) Using information for current situation, verify that the levered beta is 0.92.      

b) Using table 2, comment on how debt ratings affect credit premium. 
   What is the risk free rate and one measure used in determining debt rating?   

c) Calculate Yahoo’s tax adjusted WACC? Show your working and formulae?      

d) Determne the optimal capital structure of Yahoo (from table 4) and comment on changes required to achieve it?                     
e) Crowdfunding is a relatively recent phenonemon is corporate fundraising. Find a real-life example of  successful crowdfunded venture in the UK IT industry and discuss why crowdfunding was a better option than a conventional method?     

Question 2:
A stable dividend policy is crucial for a firm in term of shareholders’ perception of the company’s performance.


a) Critically examine, from your point of view, the four most relevant theories that explain firm’s dividend policy (at least one theory should be related to behavioural finance). Each theory description should include the main assumption(s) of the theory, its main idea, its main result(s)/prediction(s) and its main weakness(es).                 b) Explain zero-dividend puzzle.                               

c) Present an Excel file with dividends for Apple between 2000-2017 and create a chart.                                                     

d) Using data in question c) provide an example that can illustrate at least two theories described in a)? Use articles/news or other information to support your conclusions. Which theory(ies) is most powerful in your opinion?                        

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