1. What is capital structure? How does it reflect riskiness of a company?

2. Why is the use of long-term debt in the capital structure referred to as using financial leverage?

3. What is the fundamental principle of financial leverage? When does financial leverage work positively and when does it work negatively?

4. A companys capital structure consists of $50 million in shares with a required return of 15% and $40 million in bonds with a required return of 9%. Assume that the company could issue $10 million in additional bonds and use the proceeds to buy back $10 million worth of equity. What would happen to the companys WACC? What would happen to the required rate of return on the companys shares?