Questions: 1. (a) States what is the pecking order theory? (3%) (b) Are CEOs subject to agency problem in the pecking order theory? (2%) (c) In the pecking order theory, what is the factor CEO considers in determining how to finance firm's projects? (2%) (d) What are the implications arising from 6 the pecking order theory? That is, what are the predictions of the pecking order theory? (3%). 2. Discuss MM Propositions I and II in a world without taxes. List (a) the basic assumptions (2%), (b) results (=predictions), (2%) and (c) intuition of the model. (2%) 3. Discuss MM Propositions I and II in a world with taxes. List the basic assumptions (2%), (b) results (2%) (c), and intuition of the model. (2%) 4. States or defines (a) trade-off hypothesis of capital structure (3%) (b) signaling hypothesis of capital structure(3%) (c) free cash flow hypothesis of capital structure(3%). 5. The indirect costs of financial distress include impaired ability to conduct business and the agency cost between shareholders and debtholders, which is magnified when financial distress is incurred. Illustrate three kinds of selfish strategies that shareholders use to hurt the bondholders and help themselves. (6%).