More FoF Flashcards
essay points for small size effect / SMB
- It suggests that smaller companies (with lower market capitalization) tend to outperform larger companies
- due to Higher growth potential but higher risk
- and Illiquidity which makes them less frequently traded making them cheaper relative to their true value
negatives about PR1YR
- not a stand alone strategy
- requires frequent rebalancing
3 FFC
Market Risk, SMB (Size), HML (Value)
4 FFC
Market Risk, SMB (Size), HML (Value), PR1YR (Momentum)
Explain what pecking order theory is
explains how companies prioritize their sources of financing
firms follow a hierarchy when making capital structure decisions, with a preference for internal funding first, then debt, and lastly equity financing as a last resort.
why is the pecking order in POT
internal funding first, then debt, and lastly equity financing
Internal Funds: Using retained earnings avoids signaling any negative information to the market
Debt is okay if the company is confident could be a good signal
Issuing new shares can be a signal to the market that the company’s existing resources are limited or that its future prospects are uncertain
Criticisms: does not hold in all market conditions, no tax considerations
Pros and cons of a tender offer
Pros: Targeted buying, confident signalling, Faster Acquisition
Cons: price might not be attractive enough, lots of paperwork , high cost
Open market repurchase pros and cons
Pros: Lower Cost. flexibility/ no disclosure cost, Less Disruption to stock price
Cons: Slower Acquisition, Less Control over who you are buying off, Limited signaling Effect
what is the perfect market view of change in dividend policy
according to M&M a change in dividend policy should not have any impact on the overall value of a firm.
Investors can choose to receive a cash flow directly through dividends or sell some of their shares to generate their own desired cash flow. Valuation Based on Future Cash Flows
describe the international fisher effect
The International Fisher Effect (IFE) is an economic theory that attempts to explain the relationship between interest rates and exchange rates in different countries.
give an overview of APT
APT is a theoretical framework that offers a broader perspective on asset pricing compared to CAPM. By considering multiple risk factors and assessing a securities beta with them.
APT assumes a linear relationship between an asset’s expected return and its sensitivity (beta) to each factor
However, its practical application has limitations due to challenges in identifying and measuring factors. Investors should consider both APT and CAPM
The theory suggests that rational investors will identify and eliminate pricing inefficiencies
5 examples of factors incorporated in APT
Market Risk (similar to CAPM)
Inflation Risk
Interest Rate Risk
Industry Risk (risk associated with a specific sector)
Profitability Risk
explain some takeover defences companies have
poison pills - The poison pill sets a threshold for how much of the company’s stock a single shareholder can buy, if triggered the poison pill gives existing shareholders the right to buy additional shares of the company’s stock at a discounted price.
this heavily dilutes the acquires holdings and drives the share price down.
in effect makes the company less valuable and harder to control
Staggered board - 1 third elected once every 3 years
white knight - company looks for a friendlier company to take it over
change in capital structure to appear less attractive
heavy payment required by managers
explain the radical perspective
due to income tax > capital gains tax
a company paying cash dividends is less attractive than one that uses stock repurchase
sinking funds definton
when part of the issue is repaid before maturity
