The objective of firms is to maximise the shareholders wealth. By doing so, management should make the best decisions for its financing and investing to create value in shareholders interest. Thus, the information pertaining to firms financial decisions should be incorporated into its stock price. As a junior fund manager, you are tasked to analyse the possible value of firms information in your investments.

Required:

1. (a) According to the modern financial management theory, the separation of ownership and management results in the conflict of interests between financial managers and shareholders. What theory explains this problem in finance? What is this problem called and how do firms resolve it?

   (7 marks)

2. (b) You believe that both financing and investing decisions contain fresh information of firms value perceived by the investors. Thus, stock price reacts positively or negatively to it. List three decisions each for financing and investing made by firms.

   (6 marks)

3. (c) If you believe Capital Asset Pricing Model (CAPM) is true to price the risky securities, what would be the impact of firms decisions on your investment portfolio value.

   (6 marks)

(d)Hedge fund managers believe that event-driven investment strategy, i.e. announcements of firms financing and investing decisions, could possibly generate abnormal or excess portfolio return. Do you agree with this statement and why? State your assumptions when necessary.

(6 marks)