1) Describe two benefits and two costs of financial leverage. Do not name benefits and costs that are

general to equity as well. For example, to increase capital is not a good answer; it is not specific to

debt but it is true for equity as well.

2) Name two conditions when a company should increase leverage.

3) Abby is a large and successful pharmaceutical company. The company has many highly profitable

drugs with a few years of patent protection. Earnings have increased significantly for the past few

years. However, it is difficult to see the growth rate could continue. The company has paid out 40% of

earnings as dividend. With strong sales and operating cash flow, the company has had a large sum of

cash. What should Abby do with the buildup of cash? Defend your position. You can create a

potential scenario if you would like.