Problem 2. What is operating leverage? How, if at all, is it similar to financial leverage? If a firm has high operating leverage, would you expect it to have high or low financial leverage? Explain your reasoning.

Problem 6. Why might it make sense for a mature, slow-growth company to have a high debt ratio?

Problem 10. FARO Technologies, whose products include portable 3D measurement equipment, has 400 million shares outstanding trading at $5 a share. The company announces its intention to raise $200 million by selling new shares.

a. What do market signalling studies suggest will happen to FAROs stock price on the announcement date? Why?

b. How large a gain or loss in aggregate dollar terms do market signalling studies suggest existing FARO shareholders will experience on the announcement date?

c. What percentage of the amount of money FARO intends to raise is this expected gain or loss?

d. What percentage of the value of FAROs existing equity prior to the announcement is this expected gain or loss?

e. At what price should FARO expect its existing shares to sell for immediately after the announcement?