1. What are the direct and indirect costs of bankruptcy? Give examples of firms with high and low bankruptcy costs and explain.

2. Stockholders need not be concerned with bankruptcy costs, since they will be borne by bondholders. Comment. (Assume that the firm declares bankruptcy when the value of assets is less than the value of obligations to bondholders. Thus, in bankruptcy, equity has zero value.)

3. Should firms hedge their risk exposure? Explain.

4. What financial and operational choices do firms have to hedge their exposure to foreign currency risk?