Finc 423 Final exam

Question 1

Windows of Opportunity Theory

Answer 1

1. There is no target leverage ratio
2. A firm’s capital structure is merely an accident of its own history and that of the market.
3. Managers merely behave opportunistically.
4. They are constantly seeking and exploiting mispricing in inefficient capital markets to borrow funds at the lowest cost.

Question 2

1. Detailed Description of Rating System

Answer 2

a. When firms issue their securities the rating agencies provide a public estimate of the rating of the debt.
b. The ratings are an estimate of the default risk on the bonds
c. The three largest Rating Agencies are Moody’s, Standard & Poor’s (S&P) and Fitch.
d. Here AAA (or Aaa) are the least liable to default, while D are the most likely. In fact, a bond rated C or D is probably for a firm currently in bankruptcy

Question 3

a. Investment Grade Bonds

Answer 3

AAA to BBB

Question 4

d. High Yield Bonds or Junk Bonds:

Answer 4

lower than BBB

Question 5

Speculative:

Answer 5

BB and B

Question 6

Very Poor:

Answer 6

lower ratings

Question 7

c. Payout Ratio

Answer 7

c. Payout Ratio = DPS / EPS (% given out in dividends)

Question 8

Plowback Ratio

Answer 8

d. Plowback Ratio = 1-(DPS/EPS) (% retaining)

Question 9

2. Types of Dividends

Answer 9

Regular Cash Dividends 
extra cash dividend 
special dividend -
Liquidating dividends:  
Stock dividends