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Corporate Finance

School of Economics and Finance, QUT

Reading and Tutorial Guide 01

Topic: Introduction to Corporate Finance and the CAPM

Reading: BD3rd ed. Ch1, Ch10,and Ch11

Background Reading:

Learning Objectives: A Primer on Diversification

Efficient Portfolios and the CML

The Beta and the CAPM

Applications of the CAPM

Presumed Knowledge:

The prep reading slides looked at an introduction to risk and return. This provides a starting point for the study of CAPM (this relies on work started in Finance 1)

It is important that you have revised your Finance 1 notes on the CAPM and the prep slides for topic 1, Corporate Finance builds on these ideas in this lecture

SELF-STUDY QUESTIONS

Question 1

Explain why beta is considered to be a relative measure of risk.

Question 2

Separation of ownership: in most large corporations, ownership and management are separated. What are the main implications of this separation?

Question 3

Agency issues: Many firms have devised defenses that make it more difficult or costly for other firms to take them over. How might such defenses affect the firm's agency problems? Are managers of firms with formidable takeover defenses more or less likely to act in the shareholders' interests rather than their own? What would you expect to happen to the share price when management proposes to institute such defenses?

Question 4

Evaluate the following statements:

1. "Efficient portfolios have a beta of one"

2. "A portfolio with a beta of one is efficient"

Question 5 Past Exam Question

Two stocks (A and B) have a...