1. When firms increase leverage with exchange offers, what generally happens to their stock prices? Why might this be? 2. Innovative Technologies produces high-tech equipment for the agriculture...

1. When firms increase leverage with exchange offers, what generally happens to their stock prices? Why might this be?

2. Innovative Technologies produces high-tech equipment for the agriculture industry. This is a very risky firm since the technology is not completely established and demand for farm equipment is very cyclical and interest-rate sensitive. As a new start-up, Innovative Tech cannot obtain long-term straight debt. However, it can issue equity, issue convertible debt, or obtain funds from its commercial bank. Devise a financing strategy for Innovative under thefollowing assumptions:

a. Management believes the firm is fairly priced.

b. Management believes the firm is slightly undervalued.

c. Management believes the firm is substantially undervalued.