1. What are the likely downsides of increasing a company' s leverage ratio via recapitalization (i.e., issue debt to reduce equity)? Choose three, 1 point each.

a		increase in taxes
b		increase in interest rate on new and rollover debt
c		decrease in profit margin
d		increase in earnings-per-share
e		increase in risk of default
		decrease in return-on-equity

2.

Consider stock A with a beta of .9, stock Z with a beta of 1.1 and SPY, the S&P500 ETF. You believe the estimated betas are correct for the near future and the market means the S&P500 index. Assume you must choose one of these three. Which of the following are correct? Choose two.

a		If you are confident of the market rising soon, you should purchase A.
b		If you have a strong fear of the market declining soon (but don't want to sell short), you should purchase A.
c		If you have a strong fear of the market declining soon (but don't want to sell short), you should purchase SPY.
d		If you are confident of the market declining soon, you should sell short B.
e		If you are confident of the market declining soon, you should sell short A.

3.

Suppose you have no view as to the direction of either Target Stores or Macy's. But you believe that Target stock price will outperform Macy's. You should:

a		Purchase both Target and Macy's
b		Sell short both Target and Macy's
c		Purchase Target and sell short Macy's
d		Sell short Target and buy Macy's