You need to answer all four questions. The total mark for this coursework is 100.
Additional references will be a plus (maximum 3 additional references per question) and should be cited in the main text and the full reference should be provided at the end in a bibliography section. Please, do not use hyperlinks in your bibliography.
Adding a graph or a table (that you have constructed yourself or not) to illustrate your discussion will be a plus (maximum 1 additional visual per question). It should be cited in the main text and the full source should be provided in a note below the graph/table. Please, do not use hyperlinks to provide the sources.
The bibliography, tables, graphs (including titles and note below the tables/graphs) are excluded from the world count.
The articles cited below are available on Moodle.
Question 2 (Word limit: 500 max +/ – 10%) 25 marks
Question 2 is on the article “Toys R Us buckled under private equity ownership”, by Anna Nicolaou and Kara Scannell, The Financial Times, September 2017
- Read and discuss the article and in your discussion use and underline the following terms: “Modigliani and Miller”, “business risk”, “financial risk”, “financial distress”, “leverage”, “debt-equity ratio”, “trade-off theory” and “Pay-out policy”.
- Using “Toys R Us” as an example, discuss the optimal amount of debt in the presence of taxes and costs associated with financial distress.
- Using “Toys R Us” as an example, discuss the effects of increasing the leverage of a firm to pay generous dividends to stockholders or to pay and high expenses, advisory and management fees to buyout firms.
Question 3 (Word limit: 500 max +/ – 10%) 25 marks
Question 3 is on the article “European corporates signal earnings have bottomed out”, By Nick Nelson, The Financial Times, October 21, 2020
- Read and discuss the article and in your discussion use and underline the following terms: “Pay-out policy”, “signalling”, “Asymmetric information”, “Lintner’s Model”, “Modigliani and Miller”, “Pecking Order Theory” and “Capital Asset Pricing Model”.
- Discuss the characteristics of the firms and sectors which have cut or fully withdrawn guidance on their outlook and those which have raised their expectation.
- Discuss how dividend policy can be used by firms as a “signal”. Why is it necessary for firms to send such signals?
Question 4 (Word limit: 500 max +/ – 10%) 25 marks
Question 4 is on the article “Financial Dependence and Growth”, by Raghuram G. Rajan and Luigi Zingales, The American Economic Review, 1998, Vol. 88, No. 3, pp. 559-586.
- Ranjan and Zingales (1998) consider U.S listed firms to calculate their `External Finance Dependence’ variable. How is this index measured empirically? How do they justify using only `listed’ firms and only U.S firms to calculate `External Finance Dependence’ variable?
- Describe Rajan and Zingales (1998)’s empirical strategy including the estimation equation. Discuss the importance of the fixed effects in the estimation. Explain how to interpret the estimates obtained and present the main conclusion of their paper.
- A developing country decide to liberalise its equity market. Using a similar reasoning as in the article, what are the characteristics of the firms and sectors that are expected to grow the most and the least?
Type of assignment: Coursework