1. Suppose that managers of XYZ think their firms shares are currently overvalued and suppose that their sole objective is to maximize value for their ongoing, long-term shareholders.
   1. Assume that managers of XYZ decide to raise some capital through either (a) equity or (b) debt. Which will they prefer? Why?

2. Under policy (a) in part (i), how would new shareholders be affected in the long run? Discuss some empirical evidence that is consistent with your prediction (by empirical evidence, I mean some historical evidence based on data - the relevant evidence has been discussed in class and can be found in the slides).

3. Now assume that managers of XYZ can invest the new capital in either (a) cash or (b) the typical assets of their firm. Which will they prefer? Why?