Students, who have successfully passed the Finance 1 waiver exam, may take the Finance 2 waiver exam. The waiver exam is a 2 hour written exam which will be given on campus. The exam is open note and open book. You may use a laptop and Excel. Although you can use outside resources, do not expect to have time to find resources during the exam. You should have reviewed material prior to starting the qualifying exam. You are not allowed to discuss the exam contents with others during or after the exam. The Kellogg Honor Code applies. In particular, the exam must be solely your own work.
Finance 2 is a graduate level finance class. Thus, students who have not studied finance at the graduate level have had a low probability of passing the waiver exam. Prior work experience or studying finance at the undergraduate level is typically insufficient for passing the waiver exam without study at the graduate level.
To pass the Finance 2 waiver exam you should understand and be able to explain the following concepts:
- Modigliani-Miller Capital Structure Irrelevance Theorem. The M&M theorem is the foundation for understanding optimal capital structure and optimal risk management strategy. You should be able to explain under what conditions capital structure is irrelevant and what this does mean and what it does not mean.
- Adjusted Present Value (APV). You should be able to calculate the value of a firm using adjusted present value and explain how the assumption of the M&M assumptions and the terms of the APV formula are connected. You should be able to calculate the value of each term of the APV formula and explain what assumptions must be true for the valuation to be correct.
- Weighted Average Cost of Capital. You should be able to calculate WACC, know how to use WACC to value a levered firm, and be able to explain what assumptions must be true for this valuation to be correct.
- WACC versus APV. You should be able to explain what conditions (assumptions) are required for a WACC valuation and an APV valuation to give you the same value.
- Risk Management. You should be able to explain conditions under which risk management (e.g. the use of derivatives) can created or destroy value.
- Dividend Policy. You should be able to explain under what conditions paying dividends versus repurchasing stock versus retaining cash creates or destroys value.
- Security Design. New securities are constantly being created by assembling debt, equity, and options. You should be able to explain how a given security is constructed and why it is a superior source of financing when compared to simpler options (e.g. regular debt or equity).
- Mergers and Acquisitions. You should be able to apply your knowledge of valuation and optimal capital structure to the evaluation of a potential acquisition, explaining how the acquisition is valued as wells the source of value creation (e.g. operations and/or financing).
If you have any questions about this web page, please e-mail Professor Petersen