Questions from Corporate Finance

Q: Explain how we can use the CAPM to estimate the cost of

Explain how we can use the CAPM to estimate the cost of common equity.

Q: Explain why beta estimates are “period specific” and outline the

Explain why beta estimates are “period specific” and outline the potential problems that may arise. Allude to problems with recent beta estimates.

Q: Explain the importance of using the WACC as a hurdle rate for

Explain the importance of using the WACC as a hurdle rate for making investment decisions.

Q: Why does the MCC suddenly jump up and become expensive?

Why does the MCC suddenly jump up and become expensive?

Q: What is the cost of equity (K e ) given RF

What is the cost of equity (K e ) given RF 3%, beta ( ) 1.4, expected market return ( ERM) 10%?

Q: What is the market price and market‐to‐book ratio

What is the market price and market‐to‐book ratio, assuming the firm’s stock is a perpetuity and all earnings are paid out as cash dividends (i.e., the retention rate is zero)?

Q: State the two rules of financial leverage.

State the two rules of financial leverage.

Q: In order for the M&M irrelevance theorem to hold,

In order for the M&M irrelevance theorem to hold, what key assumptions must be met?

Q: What are special purpose vehicles (SPVs)? What is the main

What are special purpose vehicles (SPVs)? What is the main advantage of SPVs? List a few forms of credit enhancement that are critical to SPVs.

Q: Explain how the static trade‐off model can be used to

Explain how the static trade‐off model can be used to find an optimal capital structure.