ECF2222 Corporate Finance

Exercise 3

Semester 2, 2020

 

Name: enter your name here

Student ID: ECU ID

Academic Integrity Checklist

Before you submit, you must ensure you can confirm you have completed this assessment with Academic Integrity.

Read each statement and check () all statements to indicate your confirmation as part of your Student Declaration.

If you are unsure about any of the following statements, DO NOT SUBMIT your assessment before speaking with your Unit Coordinator or an ECU Learning Adviser.

If you have checked to confirm all the statements, you can be confident that you have completed this assessment with Academic Integrity.

If you cannot confirm any or all of the statements, your Unit Coordinator will investigate the authenticity of your work. You may be required to attend an interview as part of the investigation. Plagiarism, collusion and contract cheating are forms of Academic Misconduct.

Possible penalties and implications arising from Academic Misconduct depends on whether the act was deliberate or unintentional. It will be dealt with in one of the following ways, in accordance with ECU Policy:

Zero mark for the task;

Zero mark for the assessment;

Zero mark for the unit;

Expulsion from the course;

Expulsion from the University.

Even past students (completed the unit or completed the course) who participate in Academic Misconduct can be implicated and be subject to the penalties listed above.

 

No Plagiarism: I have not copied and pasted from external sources, and I have cited appropriately.
No Plagiarism: My in-text and end-text citations follow APA 7 guidelines.
No Plagiarism: I have not used my own or other student’s previous assignment work.
No Collusion: I have not worked with any other students on this assignment.
No Collusion: My assignment is not based on or derived from the work of any other student.
No Collusion: I have not shown or provided other student(s) with my assignment at any point.
No Contract Cheating: I have not asked or paid someone to do this assignment for me.
No Contract Cheating: I have not used any content from a “study notes” or “tutoring” service/ website.
No Contract Cheating: I have not had a friend or family member assist me with this assignment.

Exercise 3 Instructions

Due by 5 pm Friday Week 9, 25 Sep 2020.

Submission Instructions:

This assessment is completed individually.

Answer all questions.

Submit one Word document on Turnitin for grading, before the due date. The total similarity score for your discussions/ answers should not exceed a 30% similarity score. This 30% benchmark does not include matches to the assessment questions, instructions or rubric descriptors.

This assessment comprises 10% of your final unit grade. The assessment will be marked out of 20 then scaled to a final score of 10.

Assessing your written work:

Aim to develop your ability to articulate key concepts and discuss practical implications of capital structure theories and, dividend and payout policies.

Use finance terminology to demonstrate your applied understanding and keep the language of your discussions clear for a professional non-specialist audience.

You can reference texts and articles where appropriate.

These questions provide you with foundation preparation for the types of questions you will be posed in the Final Assessment.

Paraphrase extensively to ensure your Turnitin similarity score is less than 30%. Though learning materials and module solutions provide you with a guide, do not copy and paste.

Your honestly and integrity will be demonstrated when you ensure you compose the discussions yourself. Your instructor will also be monitoring similarity and style matches across all submitted work from students in the class. Severe penalties can apply if a student is found to have committed academic misconduct.

Question 1 Capital structure, conceptual understanding and practical applications, financial leverage and theories of capital structure

Modigliani and Miller used a set of assumptions to support their Propositions that capital structure decisions have no impact on a company’s value.

Discuss three of these assumptions. Explain what the assumptions mean and critically evaluate how these assumptions do not apply in practice. Then discuss how violations of these assumptions influence the preference for debt or equity capital from the firm/ investor perspective.

(6 marks)

Type your answers in this section (min 450 words, max 600 words)

Discuss two advantages of a company raising capital through debt instead of equity.

Does financial leverage always cause an increase in shareholder returns (why or why not)?

Should a mature firm with a history of stable earnings and profits, and high levels of tangible assets be expected to have higher or lower levels of debt? Explain how debt can circumvent the ‘overinvestment’ problem in such a firm.

(4 marks)

Type your answers in this section (min 400 words, max 500 words)

Explain the pecking order theory of capital structure.

Discuss how information asymmetry leads to managers’ and investors’ preferences toward debt funding?

(2 marks)

Type your answers in this section (min 150 words, max 250 words)

Question 2 Dividend and payout policies, conceptual understanding and practical implications

Explain three reasons why a newly established or growing company would prefer to adopt a residual dividend policy.

(3 marks)

Type your answers in this section (min 450 words, max 600 words)

Explain three reasons why a mature firm with a history of strong earnings, few investment opportunities and a diverse clientele of investors would prefer a stable dividend policy.

(3 marks)

Type your answers in this section (min 450 words, max 600 words)

Why have share buybacks or repurchases become the preferred way to return cash to shareholders? Explain two reasons why a firm may prefer to buyback shares instead of raising dividend payout ratios or pay a special dividend in a financial year.

(2 marks)

Type your answers in this section (min 300 words, max 350 words)

References:

List your end-text references according to APA 7, as per your in-text citations.

 

Marking Rubric

HD (80 – 100%) D (70 – 79%) CR (60 – 69%) C (50 – 59%) N (0 – 49%)
Conceptual understanding and practical application.

Quality, structure, flow and clarity of discussions.

Concepts are well articulated with excellent use of terminology.

Discussions are well structured, and arguments are persuasive with a good flow for the reader.

Demonstrates strong understanding of the practical applications of the concepts/ theory.

All requirements of the question posed have been addressed.

Concepts are well articulated with good use of terminology.

Discussions are well structured and arguments are persuasive with good flow for the reader.

Demonstrates good understanding of the practical applications of the concepts/ theory. All requirements of the question posed have been addressed.

Concepts are reasonably articulated with average use of terminology, but need some improvements.

Discussions are reasonably structured and arguments are presented with average flow for the reader.

Demonstrates average understanding of the practical applications of the concepts/ theory. Most of the requirements of the question posed have been addressed.

Attempts made to articulate and use terminology with minor errors.

Discussions are presented with some structure but the flow for the reader can be improved.

Demonstrates average understanding with some errors, of the practical applications of the concepts/ theory. Most of the requirements of the question have been addressed.

Little/ no, or very poor attempt at articulating and using terminology with many errors.

Discussions are poorly structured and hardly flows for the reader.

Poor (no) understanding and/or many errors, in the practical applications of the concepts/ theory. Most of the requirements of the question have not been addressed.