2 Question 9 Which of the following statements about Modigliani and Miller (M&M)'s capital structure propositions is most likely to be true? A According to M&M (1958), a firm with a higher financial gearing must always have a higher market value B M&M (1958) amended their model by recognising the existence of corporate tax According to M&M (1963), a company's weighted average cost of capital remains unchanged at all levels of gearing D According to M&M (1963), there is a linear relationship between the cost of equity and the level of gearing E M Bankruptcy costs had been included in both M&M (1958) and M&M (1963) Question 10 Torquay plc exists in a Modigliani and Miller (1958, 1963) world, except that corporate taxes exist at the rate of 30%. The cost of capital for an all-equity financed firm in this world is 18% p.a., and the pre-tax market cost of debt is 9% pa. Torquay plc is funded by way of 90 milion equity and 50 million debt (both at market values). What is Torquay plc's cost of equity capital? 25.5% B 24% 23% D 21.5% E 20%