14-BMD is a firm with no debt and a market value of equity of 2 billion. Based on its profits before interest of 200 million, it can afford to have a debt ratio of 50%, at which level the firm value should be 300 million higher.

a) Assume that the firm plans to increase its leverage, discuss what source of capital it could use to get to 50%? [8]

b) Given the pecking order theory, if BMD has internal funds of 250 million at this time, discuss would that change the firm's financing decision? Discuss your answer without calculations. [7]

c) If the trade-off theory applies, would that change any of your analysis in part (b)? [10]

Total marks: [25]