Al. Consider a firm that operates in the perfect capital market of Modigliani and Miller (MM) with no taxes. The firm's earnings before interest is $2,000,000 p.a. in perpetuity. Debt can be issued at the risk free rate of400 p.a., and the interest rate on debt is not influenced by the firm's capital structure. Initially, the firm has $5,000,000 of debt. It then decides to double its debt level to S10,000,000, and use the S5,000,000 borrowed to repurchase an equivalent amount of equity When the firm had no debt in its capital structure its cost of equity was 8% p.a. a) Complete the table below and show all your calculations for the initial and new capital structures Initial Capital Structure New Capital Structure $2,000,000 5,000,000 Earnings before interest Market value of debt $2,000,000 10,000,000 Total value of the firm Market value of equit Vi Interest payable on debt Vi1 Earnings available to shareholders IV Vill b) Draw a rough graph of the relation between the overall cost of capital (ro), expected cost of equity (rE) and cost of debt (rD) for the firm at the two debt levels. Clearly label all parts of the graph. c What are the implications of the above analysis for the firm's optimal capital structure? Explain