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5 . Explain the static theory of capital structure using the graph below . Describe the meaning of each term ( RU. RE, WACC *

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5 . Explain the static theory of capital structure using the graph below . Describe the meaning of each term ( RU. RE, WACC * , RDX ( 1 - To ), and D*/E* ) on the graph below . (7 marks ) Cost of capital ( 9 /0 ) RE RU WACC Minimum cost of capital ( WAC C * ) T RD X ( 1 - TC ) Debt- equity ratio D* / E* D / E Optimal debt- equity ratio

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