Corporate Financial Management

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Corporate Financial Management

Part A (40%) 1000 words 1. With regard to Efficient Market Hypothesis, test FTSE 100 data covering the most recent 2 year period for weak form efficiency using regression analysis and hypothesis testing. You are specifically required to:

a. Create an equally weighted portfolio (A) of 5 random companies* from the index. Calculate monthly logarithmic returns for that portfolio.

b. Create an equally weighted portfolio (B) of 5 companies using technical analysis (i.e. for the first month of the 2 year period select 5 companies with the steepest positive slope of the regression line representing daily share price movements). For this you need to screen the entire index.

c. Correctly specify the hypothesis for testing weak form market efficiency.

d. Test the data representing logarithmic returns of the two portfolios for weak form efficiency by means of the one tail independent samples T-test selecting an appropriate level of significance.

e. Discuss your findings in terms of the results of the test.

f. Critically evaluate generalizability of your findings in terms of contemporary empirical study findings on weak form market efficiency and Random Walk Theory.

(25 Marks)

2. Select a company** from FTSE 350 and calculate its Weighted Average Cost of Capital. Demonstrate how the WACC changes with the level of indebtedness of the company. You are specifically required to:

a. Select and justify an appropriate data set representing historical levels of indebtedness and the corresponding WACC for the chosen company.

b. Conduct correlation analysis of the two variables (WACC and debt).

c. Interpret the results with reference to the traditional view on the WACC and theories such as Modigliani and Miller.

d. Identify one specific investment project that this company discloses most information about and with reference to it discuss the relationship between the WACC and investment appraisal.

(15 Marks)

Part B (60%) 1500 words

Section B         Academic Essay

You are required to write one of two essays. Both of the essays relate to International Merger & Acquisition activity in the Semi-Conductor Industry, in particular the bid by Singapore-incorporated Avago Technologies $37bn bid to buy US-Based Broadcom being the focus of the essays. Specifically the students are required in their chosen essay to reference key components of the 27^th May 2015 Bloomberg News article “Avago to Buy Broadcom for $37 Billion in Biggest Tech Deal Ever” though it is expected and required that students go beyond this article in their chosen essay to demonstrate extensive engagement with the issues. The full article is included in the next section of the assignment titled “Case Article”, and is followed by links to a small selection of related Bloomberg News videos about the merger which ran at that time and a link to Avago Technologies Ltd “Investor Relations” section of their website which contains a wealth of information regarding the company.

Essay 1

1. You are required to critically evaluate the effect of Capital Structure and Cost of Capital upon the  wealth returns that Avago shareholders can expect when the a company engages in International Merger and Acquisition activity. Your answer should specifically relate to Avago Technologies bid for Broadcom, and demonstrate an extensive engagement with appropriate academic literature. Students are expected to specifically comment on the method of funding for the Avago Technologies bid and use academic literature to critically analyse the possible effects for the bid structure, and are expected to specifically comment on the following part of the case article related to bid structure:

Your essay should conclude by coming to a judgement as to whether or not Avago shareholders should support the deal as one which would be wealth creating, or like analyst Alex Gauna in the case article have possible “mis-givings”.

(60 Marks)

Essay 2

2. You are required to critically evaluate the ways in which Broadcom shareholders can first understand the value of the shares they own, and then use that evaluation to judge whether or not bids for those shares rationally and efficiently reflect ‘good value’ in a dynamic marketplace. Your essay should comment specifically to the section (below) of the article related to market price reactions to Avago Technologies $37bn bid and display an extensive engagement with appropriate academic literature..

Your essay should conclude by coming to a judgement as to whether or not Broadcom shareholders should accept the recommendation of Broadcom’s Board of Directors to sell their shares at the agreed deal price.

(60 Marks)