Questions:
1. According to the trade-off theory, how is the capital structure determined? Firms have an incentive to add leverage to the capital structure. Briefly describe an incentive to add leverage. Then, refer to Equation 16.10 in the material this week and explain how indirect costs of financial distress affect firms in different ways.
2. The catering theory of dividends suggests that managers pay dividends because of investor demand. Conduct a search for an article on this theory. Indicate the article you found and briefly provide an opinion on this theory. Propose alternative ways, covered in the reading material, in which investors can receive cash returns from their investment in the equity of a company.
3. Describe the four characteristics of IPO puzzles, in your own words, and why a financial manager is concerned about them. Find an example of one of these puzzles using a business news website, such as Bloomberg, CNBC, or Marketplace, among others. Briefly describe the example and how it fits with one of the puzzles.
4. Navigate to the Yahoo! Finance Options Center at https://finance.yahoo.com/options/. Next, in the search box at the top of the page, enter a publicly traded company (note, avoid penny stocks and thinly traded companies; instead, search for large publicly traded companies to ensure you find sufficient options for it). Click on the Options tab in the center of the page to review your company's calls and puts. Select one in-the-money call or put and one out-of-the-money call or put. Indicate in your response the company you selected, the current stock price, the strike price for each of the two options, and which is in and which is out of the money. Briefly explain why the prices of the call and put of your selected stock are related.
5. In 200-250 words, explain why diversification is a wise strategy for investors. Given the benefits of diversification, why shouldn't managers acquire firms in different industries to diversify a company?