Module 13 - Financial theory Part 2

Question 1

What is the announcement date?

Answer 1

When a company announces to shareholders it will pay a dividend.

Question 2

What is the ex dividend date?

Answer 2

The date somebody is not entitled to the dividend if they do not already hold the shares.

Question 3

Who is the payment made to?

Answer 3

Anybody holding a share on the record date

Question 4

What is the payment date?

Answer 4

The date the dividend is paid out.

Question 5

What is the traditional theory of dividend policy?

Answer 5

That there is a correct amount of dividend that should be paid out.

Question 6

MM argues investor wealth is unaffected by dividend policy. What is the client effect?

Answer 6

The basis that clients may choose cum/ inc shares based on tax brackets.

Question 7

When assessing a project there are three types of certainty:

Answer 7

1. Certainty where only one possible outcome exists and the the impact can be predicted absolutely.
2. Risks where all possible outcomes are known - probability must equate to 1.
3. Uncertainty where not all possible outcomes are known.

Question 8

Typical causes of risk sensitivity stem from:

Answer 8

1 environmental

2. Social, political and economic
3. Estimates of market size and composition
4. Estimates of technology change
5. Cost price inflation
6. Supply sources
7. Interest rates/ tax
8. Government policy

Question 9

When calculating the expected return from two projects what must you do?

Answer 9

1. Cash flow multiplied by probability

2. Standard deviation of the figures calculated above.

Question 10

What are the two types of portfolio risk?

What did the study regarding systematic and specific risk show?

Answer 10

1. Systematic Risk (market risk)
   - cannot diversify
2. Specific Risk
   - can diversify

That in a spread portfolio of 20 securities it was possible to diversify away 95% of risk. So potentially an investor could have a portfolio of only systemic risk.

Question 11

What is beta?

Answer 11

Compares an individual security to the market as a whole.

A high beta fluctuates more.

A security with a beta of zero has the same a government stock.

It is calculated using historical information.

Question 12

What is the risk premium with regards to CAPM?

What is the CAPM equation?

Answer 12

The difference between the market rate and the risk free rate (Rm-Rf).

K=Rf + B(Rm-Rf)