EVALUATION GUIDELINES - Written examination

Component of continuous assessment

GRA 65141
Corporate Finance

Department of Finance

Start date: 06.12.2019 Time 09:00

Finish date: 06.12.2019 Time 11:00

For more information about formalities, see examination paper.

Solution Final GRA 6514 - Fall 19

Question 1
To achieve the same payout as Without you would need to invest $1000 in
With Bond's paying 5% interest and purchase a 10% stake in With's equity
paying $50 or $150 in dividends.

Question 2
See class notes

Question 3
a) P ex = 47.19
b) 6.75%.

Question 4
N P V = 2, 867, 569.37

Question 5
1) No they would not
2
2)UM = [Eλb + (1 − E) eb] − e2
2
UB = απ [E + (1 − E) λe] − E2

3)
απ(1−λb)
e∗ = 1 − 1−λαπb

απ(1−λb)
E∗ = 1−λαπb

Question 6
a1) If the company has not distributed any dividend, the investment oppor-
tunity will be taken any time it present itself.
a2) Because of adverse selections (see class notes for the proof) the invest-
ment will be taken only when state 1 occurs.
b1) if a 100 dividend is distributed, the equity drops from 102.5 to 100
b2) The MM payout policy irrelevance argument does not hold true