Q1
Using examples, explain the applications of ‘tracking’ and ‘replication’ in these contexts:
Factor models of asset pricing
An investor wishing to ‘undo’ a firm’s capital structure decision
The binomial option pricing model
Q2
Explain the underlying reasoning for the following propositions in the context of company dividend policy:
‘Dividend policy is irrelevant to a firm’s value’
‘Dividend policy is strongly affected by the tax rates on income and capital gains’
‘Dividend stability and signalling are valued by many investors’
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