0 Week 13 Revision Lecture

1 Lecture Outline Course Revision Recap in more detail the chapters after the break Quiz Exam Structure How to study for the exam Final comments

2 Week 6 Chapter 12: Risk and Return How to calculate investment return Arithmetic and Geometric Averages How to measure risk Variance Standard Deviation Lessons from Capital Market History Risk Premium Risk-Return Relationship Efficient Market Hypothesis

3 Week 8 Chapter 13: SML and The Required Return Expected Return with unequal probabilities Variance with unequal probabilities Portfolio Expected Return Portfolio Variance Principle of Diversification Systematic and Unsystematic risk CAPM and SML Reward-to-Risk Ratio

4 Week 9 Chapter 15: Cost of Capital Discount rate of the firm Target capital structure - D/E Cost of Equity DGM & CAPM Cost of Debt YTM Weighted Average Cost of Capital – WACC Unadjusted, Adjusted, use in NPV Flotation costs

5 Week 10 Chapter 17: Capital Structure Policy Optimal Capital Structure Value of the firm Cost of capital Capital Structure Theory – Three cases Case I – No taxes Case II – With taxes Case III – With taxes and Bankruptcy Costs Types of Bankruptcy Costs Direct Indirect

6 Week 11 Chapter 18: Dividends & Dividend Policy Irrelevance of dividend policy Homemade Dividends Real world factors Information content effect – signalling Clientele effect Types of dividend policies Residual, Constant Div. Growth, Constant Payout, Compromise, DRP Stock splits, stock dividends and repurchases

7 Week 12 Chapter 14: Options Basic concepts & Terminology Option Valuation ESO’s and Warrants Equity as an Option Capital Budgeting Options Timing Options Options to Expand/Abandon/Suspend

8 Quiz Do we use GM or AM in variance calculation? What is Beta, Systematic or Unsystematic Risk? What is the value of market Beta? If an asset is undervalued, where should it be located with respect of the SML? To maximise value of the firm, WACC should be maximised or minimised? If a firm has debt and taxes, what happens to the cost of capital as D/E increases? In a perfect world does dividend policy matter? What happens to the share price in a reverse split? What is a put? When would you buy a put? What is an option to abandon?

9 Exam Instructions 3 hours examination All chapters after Week 5 covered No specific calculations from week 1-5, however know the basic concepts 10 minutes perusal You can write during perusal on the exam paper Closed Book Don’t bring the formula sheet with you!!! Materials allowed: Scientific or financial calculator English Translation Dictionary

10 Exam Structure Question 1 is compulsory, and is worth 19 marks. All students must attempt Question 1. Attempt any three questions from the remaining five. Questions 2 to 6 are worth 12 marks each.

11 Exam Structure Question 1. (a), (b), (c), (d), (e). Answer ONLY 3 of remaining 5 questions. Question 2. (a), (b), (c), (d). Question 3. (a), (b), (c). Question 4. (a), (b), (c). Question 5. (a), (b), (c). Question 6. (a), (b), (c), (d).

12 Exam Venue 2201AFE - Corporate Finance: Wednesday 18 th of June, 8.30am Sharks Function Centre Sharks Leagues Club

13 How to Study? Practice!! Practice!! Practice!! Tutorial questions Lecture examples Chapter examples Read Lecture Notes Read the chapters in the text, definitions Theory questions can be from anywhere!!!

14 Consultation Times Consultation during study week As usual Will be in the office every day (check before you come to see me) If you cannot make it to uni, try and contact your tutor or contact me via or telephone:

15 End of Review Lecture Good Luck!!