CORPORATE FINANCE (FIN6850): REVIEW QUESTIONS

1. Dividend payment either through share repurchase or cash distribution can

be interpreted as a signal of good news or bad news. Adherent of the
dividends-are-good school sometimes point to the fact that the stocks
with high yields tend to have above-average price-earnings multiples.
Comment.

2. In a perfect capital market, how important is the firms decision to pay

dividends versus repurchase shares? Why would investors have a tax
preference for share repurchases rather than dividends?

3. R.W. Masulis analysed the stock price impact of exchange offers of debt for
equity or vice versa. 1 In an exchange offer, the firm offers to trade newly
issued securities for seasoned securities in the hands of investors. Thus, a
firm that wanted to move to a higher debt ratio could offer to trade new
debt for outstanding shares. A firm that wanted to move to a more
conservative capital structure could offer to trade new shares for
outstanding debt securities. Masulis found that debt for equity exchanges
were good news (i.e. stock price increased on announcement) and equity
for debt exchanges were bad news. Are these results consistent with the
trade-off theory of capital structure?

4. Terms loan usually require firms to pay a fluctuating interest rate or fived
rate. Analyse term loans under different alternatives.

5. What are the key differentiating factors of Islamic corporate financing

solutions as compared to conventional products?

6. What benefits ensure from a merger that would lead a company to pay
more than the market price for the acquisition? Identify the gains to both
acquiring and target firms upon announcement of a takeover; provide
reasons for those gains to accrue.

7. Case Study: RJR Nabisco

1 R.W. Masulis, The Effect of Capital Structure Change on Security Prices: A Study of Exchange Offers, Journal of
Economics 8 (June 1980), pp. 139-177, and The Impact of Capital Structure Change on Firm Value, Journal of Finance 38
(March 1983), pp. 107-126.