Discussion questions
Answer four of the following five discussion questions. Your discussion for each question should be a maximum of one page, using 12 point Times New Roman font with 1.5 line spacing.
1. Discuss how information asymmetry (the fact that corporate managers often have information about the company that is not yet known by shareholders) and signalling affect payout policy and capital structure decisions.
2. Discuss the advantages and disadvantages of adding debt to a company’s capital structure. For what types of companies is the optimal debt/equity ratio (the debt/equity ratio at which the company value is maximised) likely to be relatively high, and for what types of companies would you recommend a low ratio?
3. Discuss the determinants of a company’s cost of capital. In your discussion, make sure you distinguish between systematic and non-systematic risk and also explain the effects of leverage on the cost of capital.
4. Empirical evidence suggests that most markets are semi-strong form efficient. What does this mean for corporate managers – what are the implications of semi-strong form efficient markets for the various types of decisions corporate managers make.
5. Assume a divisional manager has handed you a description of a potential investment project, and is asking for you to approve the project. The divisional manager has done an NPV analysis, which shows that the project has a positive NPV. Discuss how confident you would be about the NPV of the project and what you might do to increase your confidence in the analysis.
