A company's capital structure is the combination of debt and equity that is used to finance its operations.

a. Clearly explain thedifferencesbetweenbusiness riskandfinancial riskin a company.

(2 marks)

b. Should the value of the company be affected by its capital structure? In your answer, explain the Modigliani-Miller Trade-Off theory of capital structure and clearly explain its predictions as to when the company's capital structure should not matter and when it should.

(10 marks)

c.Whydo the predictions of the Pecking Order theory of capital structure differ from those of the M-M Trade-off theory?