4. Explain the pecking order theory and the trade-off theory of capital structure.

A. Calculation and Q&A (100 points, 20 points for each question) 1. Explain the efficient market hypothesis.

2. Explain the difference between stock split and stock dividend.

3. A NUK Corporation bond has a 6 percent coupon rate and a $1,000 face value. Interest is paid semiannually, and the bond has 3 years to maturity. If investors require a 7 percent yield, what is the bond’s value? What is the effective annual yield on the bond?

5. Suppose the NUK Corporation has decided in favor of a capital restructuring that involves increasing its existing $70 million in debt to $100 million. The interest rate on the debt is 8 percent and is not expected to change. The firm currently has 8 million shares outstanding, and the price per share is $40. If the restructuring is expected to increase the ROE (return on equity), what is the minimum level for EBIT (earnings before interest and tax) that NUK’s management must be expecting? Ignore taxes in your answer.

b. Does this stock portfolio on averagely include low P/E stocks? Why or why not? [3%]

a. Please compute abnormal return, and state whether this investment strategy can earn abnormal return [2%]

b. Draw another SML on the same graph to reflect an RFR of 9% and an RM of 17%. [3%]

a. Draw Security Market Line (SML). [2%]

3.Explain (also with graph) that the equity of a firm can be viewed as a call option.(五分,答案以四 行為限,否則不予計分,繪圖不在此限)

2.The underpricing of initial public offering (IPO) stocks is one of the well-kno financial economists document in corporate finance. Define IPO underpricing and brietly discuss the own empirical puzzle possible reason(s) for such phenomenon.(十分,答案以六行為限,否則不予計分)

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