Final deck

• What theory justifies the pecking order of financing?

  Pecking Order Theory
• What do Myers and Majluf (1984) argue about managers' knowledge?

  Managers know more about current earnings
• Who do managers act in the best interest of according to the pecking order theory?

  Current shareholders
• What is the least disruptive financing option according to the pecking order theory?

  Retained earnings
• What risk is associated with issuing equity?

  Shares may be overvalued
• What do Baker and Wurgler (2002) propose about market timing?

  Issue equity when share price increases
• What is a dilemma for managers regarding issuing equity and debt?

  Issuing equity risks share prices dropping
• What is the pecking order for financing according to the theory?

  1. Use retained earnings
  2. Issue debt
  3. Issue equity
• What do ordinary shares represent?

  Equity capital with voting rights
• What is the obligation regarding dividends for ordinary shares?

  No obligation to pay dividends
• What do ordinary shareholders receive after debt and preference payments?

  Residual earnings
• What is the cost of equity associated with ordinary shares?

  Higher cost due to high risk
• What are preference shares a combination of?

  Debt and equity
• What is the fixed obligation of preference shares?

  Fixed dividend rate
• What happens if a preference dividend is missed?

  Dividends accumulate
• What is a disadvantage of preference shares regarding control?

  No control of the company
• Why are preference shares considered tax inefficient?

  Dividends are non-deductible
• What can preference shares be converted into?

  Ordinary shares
• What type of risk is systematic risk?

  Market risk affecting all firms
• How can unsystematic risk be reduced?

  Through diversification
• What does standard deviation measure in finance?

  Volatility of asset returns
• What does a correlation coefficient of -1 indicate?

  Maximum risk reduction
• What does a correlation coefficient of 0 indicate?

  No relation between assets
• What does a correlation coefficient of +1 indicate?

  No diversification benefit
• How does diversification affect risk?

  Diversification decreases risk
• What is the clientele effect in dividend policy?

  • Shareholders prefer dividends matching consumption
  • Stable dividends attract loyal clientele
• What does signaling theory suggest about dividends?

  Dividends signal future company performance
• What is the implication of declaring dividends?

  It provides information to the market
• What does the Bird in Hand theory suggest?

  Current dividends are more valuable than retained earnings
• What are the advantages and disadvantages of NPV, IRR, and Payback Period?

  NPV:

  • + Accounts for time value of money
  • - Needs accurate estimations

  
  

  IRR:

  • + Easy to read and intuitive
  • - Can be misleading for unconventional cash flows

  
  

  Payback Period:

  • + Easy to calculate
  • - Ignores time value of money
• What does NPV account for in financial analysis?

  Time value of money
• What is a limitation of IRR?

  Can be misleading for unconventional cash flows
• What is a limitation of the Payback Period method?

  Ignores time value of money
• What is pecking order theory

  Prefer to issue debt rather than equity is capital has to be raised
• What is market timing theory and who is the reference

  issue equity when share price is up and issue debt when share price is down. The reference is Baker Wurgler, 2002
• What is the order of pecking

  1. Retained earnings
  2. Issue debt
  3. Issue equity
• What type of shares are a combination of debt and equity

  Preference
• What is high risk high payouts

  Ordinary shares
• Who receives dividend first? Ordinary or preference?


  Preference