İŞLETME FİNANSI II - Deneme Sınavı - 7

Agency theory suggests that agency problems may arise if managers (agents) pursue different objectives other than those of the shareholders (principals). Shareholders’ seek for wealth maximization which can be attained by the maximization of the value of the firm. However, managers often waste shareholders’ wealth by consuming perquisites or investing in pet projects.

Asymmetric information occurs when one party from a financial transaction has different information than the other.

Pre-emptive right offers the existing shareholders the first opportunity to purchase additional equity shares in proportion to their current holding capacity.

Debt financing is tax deductible. Thus, except for issuing shares of stock, which is equity financing, the other sources given are tax deductible.

A sinking fund is an account managed by the bond trustee for the purpose of repaying the bonds.

Asset-backed, or securitized, bonds have been frequently used since the 2000s by the borrowers and for several years, there has been rapid growth in so-called subprime mortgage loans, which are mortgages made to individuals with less than top-quality credit. Those kinds of bonds are accepted to be one of the main causes of 2008-2009 financial crises.

A Eurobond is usually denominated in a currency (or unit of account) that is foreign to a large number of buyers. The other choices give are foreign bonds. A foreign bond is similar to a domestic bond except that the issuer of the foreign bond is a foreign entity. Hence they are issued in the domestic currency of the country in which they are issued.

For a bond with warrants attached, the buyers also receive the right to purchase a predetermined number of shares of stock of the company at a fixed price per share over the subsequent life of the bond.

Capital structure is the mix of different sources of long-term sources such as equity shares, preference shares, debentures, long-term loans, and retained earnings. Hence, it does not inlude short-term loans.

Depreciation funds are used to reduce the tax burden and overall profitability of the company

Using the CAPM formula, the required rate of return is 2 % + 0.9 * (8%-2%) = 7.4 %

Beta is s the measure of sytematic risk of a stock.

The return of the market in excess of the risk-free rate is referred to as market risk premium.

Cost of equity is the sum of the dividend yield and the capital gains yield which is equal to the constant growth rate.

As interest expense is tax deductible, after tax rate of borrowing is 5 % * (1-30 %) = 3.5 %.

Cost of capital depends on proportion of debt financing and proportion of equity financing in the capital structure as well as the cost of debt and equity financing, but not the dividend payout ratio.

Expected growth rate equals retention rate (1-0.5) times ROE (0.20), which is 10 %. Cost of equity equals D1 divided by the stock price plus the growth rate. Thus it is [1*(1+0.1)]/20+0.1 = 15.5 %

WACC= =0,50*0,10*0,70+0,12*0,10+0,40*0,17= 11.5

According to the bond-yield-plus-risk-premium approach, k= 10% + 4 % = 14 %.

g = (1-0.70) * 0.20 = 0.06 = 6 %