ECOM104 Applied Corporate Finance Examination

PLEASE ENSURE THAT YOUR WORKING IS CLEARLY SHOWN WITH ALL STEPS
OF YOUR CALCULATION INCLUDED IN YOUR ANSWER DOCUMENT, INCLUDING
ANY FORMULA USED.
When writing formulas, please note the following:
• It is acceptable to use the standard alphabet rather than greek letters. The following
are recommended: m for μ, s for σ, w for ω, r for ρ, d for Δ, b for β.
• For mathematical operators: add +, subtract -, multiply *, and divide /.
• Where appropriate, use an underscore to indicate a subscript, Eg r_f for rf.
• Use the ^ character for power, eg x^2 for x2, x^0.5 for √x.
• As an alternative to x^.5 you may type sqrt(x).
• Use brackets as necessary. To make your answer clearer use different brackets
where appropriate, eg [] {} ().
Examiner: Lea Benincasa
Answer ALL questions
If you answer more questions than specified, only the first answers (up to the specified
number) will be marked. Cross out any answers that you do not wish to be marked.
Page 2 ECOM156 (2021)
© Queen Mary University of London 2021
Turn over
Question 1
List and explain with examples 3 advantages of the debt compared to equity.
[20 marks]
Question 2
What is limited liability, and who benefits from it?
[20 marks]
Question 3
What are agency problems and agency costs? Refer to the example to Tyco in your
explanation.
[30 marks]
Question 4
Sanchez Industry is an industrial company with 103.5 million shares outstanding and a
market capitalization (equity value) of £4.41 billion. It has £1.21 billion of debt outstanding.
Management have decided to de-lever the firm by issuing new equity to repay all
outstanding debt. Explain your steps.
a. How many new shares must the firm issue?
[15 marks]
b. Suppose you are a shareholder holding 100 shares, and you disagree with this
decision. Assuming a perfect capital market, describe what you can do to undo the effect
of this decision.
[15 marks]
End of Paper

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