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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).