Question 1:

Part A:

a. The value of a share of stock depends on dividends yet a substantial percentage of the companies listed on leading stock exchanges dont pay dividends. However, investors are nonetheless willing to buy shares in them. Clearly explain how this is possible. (20 marks)

b. Explain the reasons why debt capital in a firm typically has a lower cost of capital than does equity capital in the same firm. Will debt capital in a firm always have a lower cost of capital than equity capital in a different firm? Why or why not? (40 marks)

c. Discuss the benefits and risks to investors holding fixed-income securities. (40 marks)

Part B:

a. Clearly explain the difference between horizontal, vertical, and conglomerate merger and acquisition activity and provide an example of each. (20 marks)

b. Critically discuss the reasons why mergers and acquisitions occur. (50 marks)

c. Critically discuss whether, in general, mergers and acquisitions are successful in practice. (30 marks)