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?