Questions
1. Discuss the three plausible reasons why stock prices tend to decline following the announcement of a new equity issue, but tend to rise following a debt
announcement.
2. What are the advantages and disadvantages of “going public” (i.e., selling shares to the general public)?
3. WUV Ltd. wants to raise $3.29 million via a rights offering. The company currently has 420,000 shares of common stock outstanding that sell for $30 per share. Its underwriter has set a subscription price of $25 per share and will charge WUV a 6% spread. If you currently own 6,000 shares of stock in the company and decide not to participate in the rights offering, how much money can you get by selling your rights?
4) a. Using the M&M Proposition II without taxes and security market line, we can
derive the relationship among equity beta, asset beta, and capital structure. Write out this formula.
b. Using this formula, explain the meanings of business risk and financial risk.
c. Explain, in words, the relationship among business risk, financial risk, and the cost of equity.
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