1. What is the asymmetric information concept? What role does this concept play in a company's decision to change its financial structure or issue new securities?
2. According to the pecking order theory, if additional external financing is required, which type of securities should a firm issue first? Last?
3. Explain why, according to the pecking order theory, firms prefer internal financing to external financing.
4. What assumptions are required in deriving the proposition that a firm's cost of capital is independent of its capital structure?
5. What role does signaling play in the establishment of a firm's capital structure?
6. What is arbitrage? How is it used in deriving the proposition that the value of a firm is independent of its capital structure?
7. Explain the difference between business risk and financial risk.
8. What other factors besides operating leverage can affect a firm's business risk?