1. What are agency costs, and how are agency costs of financial distress different from agency benefits of leverage? Explain their impact on calculating the value of a firm with financial distress.
2. When securities are priced fairly, why would the original shareholders of a firm pay the present value of bankruptcy and financial distress costs?
3. What are the dividend payment process and the open-market repurchase process? In your answer, be sure to explain the effects they have in a perfect world.
4. What are the benefits and drawbacks of accumulating cash balances rather than paying dividends and what effects do dividend policy have on this type of decision?
5. What impact does asymmetric information have on the optimal level of leverage? In your answer, be sure to describe the implications of adverse selection and the lemons principle for equity issuance, as well as the empirical implications.
6. Compare and contrast mature profitable firms that exhibit stable cash flows with firms that offer higher risk (dependencies on economy) with unstable cash flows. What risks do they take in regards to leverage use, tax shields, and trading information between managers and investors?