Please check out the file below and answer the questions.

Please check out the file below and answer the questions.


Midterm Exam Preparation
Each question or problem will be worth a significant number of points and you are expected to
provide original answers worthy of an advanced level student.



Approximately 60-70% of the points from your exam will come from the questions below.
10 – 20% of your exam will consist of questions from the assigned articles and videos.
10 – 20% of your points will come from a WACC problem and questions that aren’t included
below, but on a topic covered in class.
1. Explain why a risk-averse investor would never want to hold an individual stock in isolation.
2. How would you determine the appropriate required rate of return for a stock held inside a
portfolio? Explain why your method is correct.
3. If you could only hold five stocks and wanted to eliminate as much portfolio variation as possible,
how would you construct the portfolio?
4. Given the information in the table below, would it be irrational for an investor to choose to invest in
a combination of large company stocks and long-term corporate bonds instead of 100% small
company stocks? Explain.
5. Thoroughly explain this diagram from the book.
6. What does it mean for a market to be “efficient?” Assuming you were very knowledgeable in your
investment area of interest, would you rather invest in an efficient market or an inefficient market?
Explain.
7. Explain the process of determining a firm’s WACC and why it is important to know.
8. Explain what would happen to a firm that used the WACC as the required rate of return on all
investments. (Figure 14.1)
9. What are flotation costs and how do they affect a firm’s WACC? Explain using internal and external
equity as an example.
10. Explain the role of an investment banker in the IPO process.
11. How do companies obtain capital prior to going public? What advice would you give a firm
attempting to raise money this way?
12. Why is issuing stock as part of an IPO not seen as a negative signal when later issues of equity
frequently are interpreted negatively.
13. How would you judge a firm’s level of business risk and why would it be important to you?
14. What would be the advantages of a 100% equity firm adding some debt to their capital structure?
15. Explain in detail what happens as a firm adds progressively more debt? (Figure 16.7)
16. What is the information content of a firm issuing debt? Equity?
17. Why do you see debt levels vary widely from industry to industry?
18. Explain the difference between operating leverage and financial leverage. How are they similar?
19. Explain the pecking order hypothesis.
20. How can the use of debt reduce a firm’s agency costs?
21. How do the costs of financial distress (potential bankruptcy) influence capital structure?
22. Explain in detail how positive financial leverage affects ROE and EPS and also the risks of using
leverage.
23. Explain how you can tell when you have reached your optimal level of debt.
24. A firm with average debt levels for the industry has a large new project they are working on in secret
that will be extremely profitable. They need $50,000,000 to finance a plant expansion to facilitate
the project. Should they issue debt or equity to finance the project? Explain why in detail.
25. Summarize your best advice regarding paying a cash dividend.
26. What is asymmetric information and why are cash dividends an effective signal when there is
asymmetric information?
27. What are some situations where stock repurchase might be a very good idea?
28. Differentiate between a stock dividend and a stock split. How does the market tend to interpret
stock splits?
29. What is the clientele effect?
30. What factors would decide whether you paid a one-time cash dividend, increased (or started) a
regular dividend, or made a stock repurchase?

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