1. Crossler Automobiles sells autos in a market where the standard auto comes with a 10 year, 100,000 mile warranty on parts and labor. Describe how an increased probability of bankruptcy could affect sales of autos by Crossler?

2. Legitron Corporation has $350 million in outstanding debt at an interest rate of 9%. What is the dollar value of the tax shield on that debt for the current year? The tax rate is 35%.

3. If a firm increases its debt to a very high level, then the positive effect of debt is aligning the interests of management to those of the shareholders tends to become negative. Explain why this occurs?

4. A majority of firms choose a firm-commitment underwriting arrangement rather than a best-effort arrangement for their I.P.O. Explain why.

5. Explain the difference between a competitive and negotiated cash sale. Which method of sale is likely to yield the lowest funding cost for firms selling plain vanilla bonds in stable markets?

6. What does it mean to underwrite a security issue, and what compensation does the underwriter get for the transaction?

7. You own a security that you can sell on the secondary market but the price is lower than what you paid for it. How does that reflect marketability and liquidity?

8. Why do smaller businesses make less use of direct credit markets than large corporations?