1) What is operating leverage? How, if at all, is it similar to financialleverage? If a firm has high operating leverage would you expect it tohave high or low financial leverage? Explain your reasoning.
2) Why might it make sense for a mature, slow-growth company to havea high debt ratio?
3) FARO Technologies, whose products include portable 3D measurement equipment, recently had 17 million shares outstanding trading at $42 a share. Suppose the company announces its intention to raise$200 million by selling new shares. a. What do market signaling studies suggest will happen to FARO’s stock price on the announcement date? Why? b. How large a gain or loss in aggregate dollar terms do market signaling studies suggest existing FARO shareholders will experience on the announcement date? c. What percentage of the value of FARO’s existing equity prior to the announcement is this expected gain or loss? d. At what price should FARO expect its existing shares to sell immediately after the announcement?