a. Discuss Modigliani and Miller's Propositions I and II in a perfect world without taxes nor distress costs. List the basic assumptions, results, and intuition of the model. Based on this model, if the original unlevered firm value is $300 million and the CFO is planning to carry out a leveraged recapitalization to a debt equity ratio of 3:1. Whats the levered firm value? If the unlevered equity requires 11% annual return and the debt requires a 6% of annual return, whats the required return for the levered equity?

b. Describe the trade-off theory to optimize the capital structure of a firm, including the tax and financial distress considerations.