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Theory Of Finance(Pmbf 7401) Question Paper

Theory Of Finance(Pmbf 7401)

Course:Postgraduate Studies

Institution: Kenya Methodist University question papers

Exam Year:2010

TIME : 3 HOURS
INSTRUCTIONS Answer any THREE Questions

Question 1
The theory of finance holds that the Efficient Market Hypothesis has implications for investors and firms. Briefly explain the concept of Efficient Market Hypothesis, and clearly differentiate and illustrate the different types of market efficiency. (30marks)

Question 2
The term dividend usually refers to distribution of earning. Distributions from earnings are dividend and distribution from capital is liquidating dividend. Briefly discuss the following six theories of dividend.
a) The transaction theory
b) Tax theories
c) The signaling theory
d) The bird in the hand theory
e) Dividend irrelevance theory
f) The agency theory of dividend (30marks)

Question 3
Generally, a firm can choose among many alternative capital structures. It can issue a large amount of debt or it can issue a very little debt. It can issue floating-rate preferred stock warrants, convertible bonds, caps and callers. The variation in firms’ capital structure is endless due to different possible combinations.
a) Discuss Modigliani & Miller proposition I
b) Discuss the following theories of capital structure
i) The Net Income Approach [NOI]
ii) The Net operating income approach
iii) The pecking order theory of capital structure
iv) Theory-Static trade-off theory of capital structure (40marks)

Question 4
The emergence of behavioral finance in the theory of finance questioned the traditional view of the rationality of the investors as postulated by the efficient market hypothesis. Compare and contrast the efficient market hypothesis and the behavioral finance (40marks)

Theory Of Finance(Pmbf 7401) Question Paper

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