Lecture 5 Flashcards
(29 cards)
What is one advantage of debt financing?
Interest payments are deducted before tax
What are the opposing forces in deciding the payment of dividends?
- Residual theory of dividends
- Information content of dividends / signalling
In theory, why should a company’s gearing not matter to investors?
Because they can adjust their own leverage by borrowing
What does it mean when preferred stock is cumulative?
No common dividends may be paid until preferred dividends in arrears are paid
What is a circuit breaker?
Market halts trading when index makes dramatic / disorderly moves
What is a market order?
Transacted as soon as possible at the prevailing price
What is a limit order?
Transacts at specified price or better
What are some examples of stock market indices?
- FTSE 100
- Dow Jones Industrial Average
- NASDAQ
What is the relationship between stock market indices?
May be strongly correlated over short term but diverge over long term
What is an example of an index that is not market cap weighted?
Dow Jones
In an index, what does GBX indicate?
Prices are in pence, not pounds
If a company’s market cap is 1% of the index and its price rises 5%, how does that affect the index?
1% of 5% = index rises 0.05%
Principal-agent problems occur when…
- Managers do not act in shareholders’ interests
- Shareholders incur costs in monitoring managers
What is one way to reduce principal-agent problems?
Managers hold shares / options
What are the types of corporate takeover?
- Friendly (via board)
- Hostile (directly to shareholders)
How do hostile takeovers work?
‘Tender offer’ to purchase certain number of shares at set price + date, in exchange for cash or shares in aggressor firm
What are possible motives for a corporate takeover?
- Strategic (economies of scale/scope)
- Financial acquisition / asset stripping
- Conglomerate / diversifying acquisition
- Tax / regulatory advantages
What is a horizontal vs vertical merger?
- Horizontal: competitors merge
- Vertical: different stages in supply chain
What is a ‘poison pill’?
Mechanism to make hostile takeovers prohibitively expensive - benefits managers, not shareholders
What are drawbacks of mergers & acquisitions?
- Expensive
- May be motivated by empire-building / overconfidence
- Misallocates capital - boosts target firm’s share price but lowers acquisitor
- May be pushed by investment banks to earn fees
How is ROI calculated?
net income / investment
How is net ROI calculated?
ROI - cost of capital
What are advantages of going public?
- Access to capital markets
- Liquidity for investors
- Original owners can diversify
- External monitoring & information by capital markets = increased credibility
What are disadvantages of going public?
- Expensive process
- Costs of dealing with shareholders
- Info revealed to competitors
