Essay plans

Question 1

CAPM essay:

Answer 1

• Intro (Sharpe 64)
• Link between risk and return
• Assumptions
• Limitations

Question 2

Capital budgeting (financing projects)

Answer 2

• Internal/external capital
• CAPM for discount (RE) rate, (rf, rp, Beta)
• BAsset into BEquity
• Leverage increases risk, increase Beta
• Introduce WACC (With tax benefit)

Question 3

Capital structure

Answer 3

• CS definition and equation
• MM (Conclusion, assumptions)
• WACC relationship without tax
• Tax shield concept
• Tax shield increases firm value (Saves cash flows)
• WACC relationship with tax
• Higher leverage means lower WACC
• Trade off theory (Bankruptcy and agency costs)
• Pecking order theory

Question 4

Financial statements

Answer 4

• Balance sheet, income statement, Cash flow statement
• SHE = Assets - liabilities
• BS > Liquidity, D vs E, value vs cost
• IS > Sales - expenses, operating + non operating, net income
• CF > CFO, CFF, CFI, changes in cash balances
• Standardize statements (common size)

Question 5

Derivatives

Answer 5

• Derivatives > control risk willing to bear
• Options > Call/put, rno, pricing, Euro vs american
• Futures, exchange traded, r and obligation (closed out), mark to mkt, range of delivery dates
• Forwards privately agreed, r and obligation, commodity, one delivery date
• Hedging vs speculating, hedging example