Wow… from reading what you guys have been posting it seems like they’ve changed the course, or made it 10 times harder in comparison to last semester.
In relation to the exam…
I remember the questions being very similar to those in the tutorial question. If I remember correctly, most of my questions were practical ones (a few theory but not really), so there was a large focus on things such as interest rate swaps, WACC, debt to equity (link with WACC), capital markets, options…
There was no formula sheet in the exam, however, we were given a 3 page summary of all the main formulas in each chapter. This sheet was a guide to the million formulas. its helpful for cramming!
Hope that gives you a better picture of what to expect in the final. Golly, I’m still freaked out about how hard this thing was.
2 period certainty model – this is a bugger of a topic, think of it as the production probability function (it’s the same graph except its just about $$ rather than quantity)
Debt to equity ratio thing (can’t believe you guys are doing this chapter already, we did it as our 2nd last topic) – I’ll try to explain the example thing that was posted earlier.
“If it’s 0.5 – why is equity 1500 when debt is 500? Where does the 1/3 and 2/3 come from?” I take it you guys are talking about the residual dividend approach on page 651?? – you’ve written the wrong thing down. Its actually says if its ratio is 0.5, the firm has 50c (500) for every 1.50 (1500) in value. This 1.50 (1500) is the total value of debt plus equity, it not the value of equity in itself.
How does the 1/3 and 2/3 fit in?? 1500/3 = 500 ~ which is the 1/3 (debt). 2/3 (equity) is the remainder.
In short, all the ratio thing is saying is for every dollar of debt, you must have 2 bucks in equity.. in the above case 500 debt plus 1000 equity equals 1500 in total value.
Does that make more sense??