Discussion questions for week 2

1. Evaluate the following statement: Assuming there are no taxes, no transaction costs, and
no costs of financial distress. If a firm issues equity to repurchase some of its debt, the
price per share of the firm’s stock will increase since shares are less risky.
2. Evaluate the following statement: Assuming there are no taxes, no transaction costs, and
no costs of financial distress. Moderate borrowing will not increase the required rate of
return on a firm’s equity.