210FIN316
Exam Time Table Code FIN316
Normal answer book
LEVEL 3
EXAMINATION FOR THE DEGREE OF
BACHELOR OF SCIENCE (FINANCE)
AND OTHER DEGREES
CORPORATE FINANCE
Saturday, 20th May 2006 9:30 am - 11:30 am
Examiners: Professor Kent Matthews
and the internal examiners
Write on both sides of the answer paper
Answer THREE questions
All questions carry equal marks
Allocation of marks within questions is shown
You have TWO HOURS to complete the paper
210FIN316/2006
1 (a) Why do venture capital firms use staged capital infusion?

20
marks
(b) Why is an active IPO market important for venture capitalists?

20
marks
(c) Why do investment banks usually require venture capitalists to
hold on to their equity stake for a period of time post-IPO?
30
marks
(d) Why do issuers of IPOs leave money on the table? 30
marks
2 (a) Does competition in product markets act as a substitute for
corporate governance mechanisms?
30
marks
(b) Why might a reputation for not expropriating suppliers of finance
be worthless?
30
marks
(c) How can large shareholders be prevented from expropriating
minority shareholders?
40
marks
3 (a) According to Modigliani and Miller (1958) capital structure is
irrelevant when it is assumed that the corporate tax rate is zero.
How is this result affected when corporate and personal taxes are
both greater than zero?

25
marks
(b) What might be the impact on capital structure of having a large
family owner?
25
marks
(c) What are the agency costs of debt? 25
marks
(d) What might be the impact on firms’ capital structure of a change in
bankruptcy law, which made the bankruptcy process more
management-friendly?
25
marks
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210FIN316/2006
4 (a) If dividend income is taxed more heavily than capital gains, why
might firms still pay out dividends?
30
marks
(b) Why might growth firms in poor-investor-protection economies
pay out higher dividends than mature firms?
30
marks
(c) Why are fewer firms paying dividends today than was the case 30
years ago?
40
5 (a) How can a shareholder’s voting rights differ substantially from
their cash flow rights?
25
marks
(b) Why are widely-held firms common in some countries and not in
others?

25
marks
(c) When did the separation of ownership and control occur in the
UK? Explain why it occurred when it did.

50
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