1. In 2007, Blackstone Group purchased Hilton Hotels for $26 billion. Explain how Blackstone Group financed the investment. Also, explain its difference from the way of Merger and Acquisition.

2. A firm requires $L to pay for a single project that it wants to invest in. It raises $aL by issuing bonds and the remainder by issuing shares. The total payoff of the project if it succeeds with probability p is $SL (where S > 1) and the payoff if it fails is $FL (F < aL). The rate of interest is r. How does the expected return to bondholders, rb, vary with a, and why? How about the expected return to equity owners, re? How does the risk of their respective returns vary with a?

3. The managers of Firm A recommended that Firm A purchase Firm B because the purchase will diversify the risks of the business of Firm A. Alternatively, shareholders can diversify their risks by holding stock in Firm B. Is there any reason for Firm A to purchase Firm B? Explain it in terms of labor turnover or employment. Suppose labor turnover is costly; could that provide an efficiency saving to support the proposed purchase?

4. After a competitive bidding process, Firm G wins a contract to collect and dispose of Firm H's hazardous waste for $1,000 per year. Firm G's labor costs are $200 per year, and because of the unique nature of the waste, it has to invest $8,000 in a special made-to-order furnace money that it could otherwise have put in the bank at 10 percent interest. Thus, the annualized cost of the investment is $800. If the contract is canceled, Firm G could only scrap it and receive $1,500 for the metal. By how much could Firm H threaten to cut the fee if subsequently some dispute arises over the terms of the contract, or if the contract comes up for renewal?