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ECON6015 Finance Duration: 120 MINS (2 Hours) This paper contains 5 questions Answer ALL questions. An outline marking scheme is shown in brackets to the right of each question. Only University approved calculators may be used. A foreign language direct Word to Word translation dictionary (paper version) ONLY is permitted. Provided it contains no notes, additions or annotations.
2 ECON6015W1 1. (a) De ne and explain the concepts of rst- and second-order sto- chastic dominance, taking care to de ne any notation you use. [9] (b) Rank the following risky investment projects based on stochastic dominance. [9] Project A Project B Project C Payo¤ Probability Probability Probability 5 0.2 0 0.1 10 0.4 0.1 0.4 20 0.4 0.5 0.2 30 0 0.4 0.2 40 0 0 0.1 2. Two rms, A and B, are identical in every way except in their capital structure. Firm A is unleveraged while Firm B has a mixture of debt and equity. (a) State Modigliani and Millers Proposition 1. What does this imply for the value of the two rms above? [9] (b) Under what assumptions does Proposition 1 hold? [9] (c) Explain how an increase in the leverage of a rm impacts on the rms equity risk . [9] 3. (a) Explain how taxation (both corporate and personal) inuences a rms capital structure decision. [12] (b) Explain the Trade-o¤ Theory of capital structure. [7] 4. (a) How does asymmetric information a¤ect corporate nancial mar- kets? What does the Pecking Order Theory predict regarding rmscapital structure decisions? [9] (b) If a rm wants to obtain nancing (I) for an investment, under what conditions will it be desirable for the rm to pay a cost (C) for certi cation of its good quality? [9]
3 ECON6015W1 5. (a) Explain the conclusions of the Modigliani-Miller Payout Policy Irrelevance Proposition. [6] (b) Outline Lintners model of dividend payout behaviour, taking care to de ne all terms used. [6] (c) Briey assess the empirical support for Lintners model. [6] END OF PAPER Copyright 2019 v01 c University of Southampton Page 3 of 3 Social Sciences Examination Feedback 2018/2019 Module Code & Title: ECON6015 Finance Module Coordinator: Jan Podivinsky Mean Exam Score: 67.3 Percentage distribution across class marks: UG Modules 1 st (70% +) 2.1 (60-69%) 2.2 (50-59%) 3rd (40-49%) Fail (25-39%) Uncompensatable Fail (<25%) PGT Modules 70% + 41.5% 60-69% 37.7% 50-59% 15.1% <50% 5.7% Overall strengths of candidates’ answers: There were some excellent answers which provided a lot of detail, demonstrating a depth of knowledge. Overall weaknesses of candidates’ answers: Some answers were incomplete (not all parts of a question were attempted), or gained relatively low marks by providing only very brief sketchy answers. Pattern of question choice: There was no choice in this exam. Candidates had to answer all five questions. Issues that arose with particular questions: Question 1 [stochastic dominance] was answered well, generally, although many lost marks by not defining notation, showing their working or (in a few cases) using mean-variance analysis in answering part (b). Question 2 [MMP1] parts (a) and (b) generally were answered well, but several did not attempt part (c). Answers to Question 3 [taxation/trade-off theory] often lacked detail, e.g. in outlining a relevant model to explain the influence of taxation on capital structure. Some answers to Question 4 [asymmetric information] were excellent and full of detail, while others were quite sketchy. Question 5 [MMPPIP/Lintner] often had quite brief answers, particularly to part (c).