Corporate Finance

Part 1

The traditional assumptions of the perfect markets, the agency principle and the strength of the real world efficiency has underpinned comparative analyses of the so called random prices and returns by rational, risk averse investors. Nevertheless, they still provide indispensible, theoretical benchmarks for any framework of investment, first formalised as the Efficient Market Hypothesis (EMH) by Eugene Fama (1965)

Required:

Define “efficiency” and consider the implications of the EMH for the purposes of valuation and takeover in the corporate world.                                                                                                     (50 Marks)

Part 2

Modigliani, F and Miller, M.H., (1958), did set out their original case for the irrelevance of financial structure to corporate valuation and capital cost (WACC) in a perfect capital market. Referring to the original article you are required to:

1. Clearly defined the three propositions advanced by MM and explained supporting your answers how they have been proved?  (20 Marks)
2. B. Explain how do MM’s conclusions differ from a traditional view of capital structure in a tax-less world where the cost of debt is constant?                                        (10 Marks)

1. C. Within the context of investment appraisal, what are the implications of MM’s hypothesis for financial management?                                                                (20 Marks) (Total 50 Marks)

(Total 100 marks)

The assignment maximum word count should be 2500 words