Question 1. The Capital Asset Pricing Model rests on three assumptions. What are those assumptions, and how realistic are they for firms operating in competitive markets?
Question 2. Leverage increases the risk of the equity of a firm. What does that mean, and what does that mean for the value of the stock in a firm?
Question 3. Options are the right or obligation to sell or buy some asset. In the context of financial options, options represent a right in an underlying asset. Describe call and put options, and explain why someone would want to deal in options rather than in the underlying asset.
Question 4. Firms that are leveraged face a funding risk. What does "funding risk" mean to a firm that is leveraged?
Question 5. How does a company determine its credit policy?
Question 6. Sification is supposed to reduce risks, but the diversification that can result when a merger occurs can sometimes be unwelcomed by stockholders in the acquiring firm. Why would stockholders in the acquiring firm not be interested in the diversification that results from a merger?