Ch16 Financial Leverage and Capital
Structure Policy
The Effect of Financial Leverage
Capital Structure and the Cost of Equity Capital
M&M Propositions I and II with Corporate Taxes
Bankruptcy Costs
Optimal Capital Structure
Observed Capital Structures
Lo
Probability Definition
Let E be an event, containing |E| simple events.
Let S be the sample space, containing |S|
simple events.
Then the probability of event E is:
Pr(E) = |E|/|S|
Properties of Probabilities
1 0 P)1
) (
E
2)P ( E ) = 0 E never happens
3
Probability Definition
Let E be an event, containing |E| simple events.
Let S be the sample space, containing |S|
simple events.
Then the probability of event E is:
Pr(E) = |E|/|S|
Properties of Probabilities
1 0 P)1
) (
E
2)P ( E ) = 0 E never happens
3
CI Analysis
CI Width
c
Assuming all else remains equal, if c increases,
what happens to W?
A)W increases
B)W decreases
C)W stays the same
Example
Assume the mean is 5, sigma = 2
and n = 9 C=2
C=1
CI Width
c
Assuming all else remains equal, if the CL
incre
CI Analysis
CI Width
c
Assuming all else remains equal, if c increases,
what happens to W?
A) W increases
B) W decreases
C) W stays the same
Example
Assume the mean is 5, sigma = 2
C=1
and n = 9 C=2
CI Width
c
Assuming all else remains equal, if the CL
i
A Mathematical Interlude
Properties of Expectation
Let a be a constant and X a r.v. then
1. E(aX) = aE(X)
2. E(X+b) = E(X) + b
3. E(X+Y) = E(X) + E(Y)
Why?
E(X+Y) = E(X) + E(Y)
Example: Let X be the time it takes to go to UW
from WLU and Y the time it tak
Hypothesis Tests (HT)
An Introduction
Steps
We will break the process of an hyothesis test
into several steps:
1. The Hypothesis
(the charge!)
2. The Formula
(the evidence!)
3. The Pvalue
(the decision!)
4. The Conclusion
(formal description)
P value
The
START HERE
Formulas for Board (Oct 5th)
Independence, conditional prob (x2)
Conditional Probability
Tree Diagram Example
Tree Diagram
Tree Diagram Notes
Adding the branches gives a total of 100%.
Tree Diagram Notes
Along a branch we say the word AND
Study
Oct 13
A New Tool: Factorial Notation
N!
= N factorial
= n(n-1)(n-2)(2)(1)
e.g.
3! =
A) 3
B) 6
C) 5
D) 12
Factorial, Special Case
We define n to be an integer greater than or equal
to zero.
What is 0!=?
What is 1!=?
A New Tool: The Choose
Function
Suppose
Comparing Two Samples
What if we want to compare two groups?
Males and Females
New Drug to Old Drug
Salmon and Perch
Tech stocks and Financial Stocks
Comparing Two Groups
How we compare those groups depends on
whether or not they are dependent or
independ
Sampling Distributions
Goal: To show you that certain mathematical
formulas have a known distribution.
Example: If X~ N(,2 ) then
Z=
Is N(0,1).
The Mean/Sum [Original]
Consider the following experiment:
I flip a coin. The distribution for the coin flip is
Hypothesis Tests (HT) Methodology
Particular Recipe for HT Sigma UNknown
1. Determine the hypotheses 2. Use the formula:
3. Calculate a p value:
4. Make a conclusion
A "Nermal" Curve
Example
8 Northern Ontario Lakes pH levels are measured. The average is
Oct 8th
Expectation
Formula:
Concept:
Populations Vs Samples
Pictorially:
Populations vs Samples
Example:
e.g. a)
I roll la die 3 times and get 3, 2, 4 What is the sample mean?
b)
What is the expected value?
Variance
Formula:
Concept:
e.g. a)
I roll la di
BHP Struggles to Dig Into Its Cash
Mountain
BHP Billiton is finding success a headache
UBS estimates its share price trades at a 12%
discount to the company's net present value
Many investors are clamoring for BHP to return
the cash via increased share
Probability
We can define probability in 3 ways.
Subjective
Relative frequency
Mathematical / classical
Subjective
Based on intuition we guess what the
probability is.
i.e. Theres a 99% chance Ill pass!
Subjective
Adv:
Disad:
Relative frequency
The probab
STAT 211 SECTION 001 TEST #1
Name (Print Neatly): _
ID:_
USE THE ROUGH WORK PAGES AND THIS BOOKLET TO SHOW YOUR
WORK
1.
This is an 80 minute closed book test.
2.
You are allowed to use a NONPROGRAMMABLE calculator.
3. All electronic devices should be turn
Oct 15th
Binomial
Poisson
Poisson Vs. Binomial
Example
Co-op is always investigating student hiring. On
average 10 students are hired per day.
Students are hired independently.
A) In a work week, find the probability that 60
students are hired.
Example
Co
Prepared by: Salvatore Curcio, Yu Zhou, Cecilia Kwong, Vivian Seh
MMT Study Guide M01 -M05
Business and IT Strategy Learning Objectives
1. IT value proposition and myths associated with IT spending and profitability
Strassmans study: no correlation betwe
Ch18 Short-Term Finance and
Planning
Tracing Cash and Net Working Capital
The Operating Cycle and the Cash Cycle
Some Aspects of Short-Term Financial
Policy
The Cash Budget
A Short-Term Financial Plan
Short-Term Borrowing
Summary and Conclusions
18
Chapter 15 Raising Capital
The Financing Life Cycle of a Firm: Early-Stage
Financing and Venture Capital
The Public Issue and the Basic Procedure
IPOs and Underpricing
The Cost of Issuing Securities
Rights
Dilution
Issuing Long-Term Debt
15-1
How d
Chapter 17 Dividends and Dividend
Policy
Does Dividend Policy Matter?
A Resolution of Real-World Factors?
Establishing a Dividend Policy
Stock Repurchase: An Alternative to Cash
Dividends
Stock Dividends and Stock Splits
17-1
17.1 Payout Basics
Differen
Ch21 International Corporate Finance
Foreign Exchange Markets and Exchange Rates
Purchasing Power Parity
Interest Rate Parity, Unbiased Forward Rates,
and the International Fisher Effect
International Capital Budgeting
Exchange Rate Risk
Political a
Chapter 23 Mergers and Acquisitions
The Legal Forms of Acquisitions
Taxes and Acquisitions
Accounting for Acquisitions
Pros and Cons of M&A
Defensive Tactics
Evidence on Acquisitions
Divestitures and Restructurings
23-1
Canada becomes the destination of c
Ch24 Risk Management
An Introduction to Financial
Engineering
Hedging and Price Volatility
Managing Financial Risk
Hedging with Forward, Futures, Swap and
Option Contracts
24-1
LO1
Hedging Volatility 24.1
Return Volatility is a classic measure of risk
Ch25 Options
Value of Options at Expiration
Combinations of Options
Valuing Options: Various approaches
Stocks and Bonds as Options
Recommended problems
Ch24: Questions and problem 3-7
Ch25: Questions and problem 2, 3, 4, 6, 7
A.1, A.2 on Page 784, A.3 on