1.What does beta measure? Also, explain how business risk (cyclicality of revenues, operating leverage) and financial risk (financial leverage) affect beta.

2.Explain in your own words what the WACC is and how it should be used.

3.Your boss thinks that you should ALWAYS use the WACC to evaluate projects regardless of their risk. Explain why this is not correct.

4.Your boss thinks 10% is the right discount rate for all companies. Explain why you should calculate and use the WACC instead.

5.Why is the free cash flow model better than the dividend growth model at estimating firm value?

6.Explain Propositions 1 and 2 from Modigliani and Millers theory of capital structure when there are no taxes. How do these change when corporate taxes are added?

7.Financial distress costs are significant and can lead to shareholders engaging in selfish behaviors. Explain the three selfish strategies that we discussed in class.

8.Explain how trade off theory differs from Modigliani and Millers model. Be sure to explainwhat is being traded off in the model.

9.Pecking order is a signaling model based on the idea that managers have better information than shareholders. Describe the specific order of financing that is implied by pecking order theory. Also, explain what is meant by financial slack and why this is important.

10.When debt levels increase, what will happen to Rs? In the WACC equation, which term captures financial distress?

11.Explain the factors that encourage firms to use both a 1) high dividend and a 2) low dividendpayout.

12.A firm whose primary shareholders are individuals in the highest tax bracket is deciding between paying a special cash dividend and a repurchase. Which would you recommend andwhy?13.What happens to the price of a stock on the ex-dividend date?