(a)"The optimal capital structure of a firm is often defined as the proportion of debt and equity that results in the lowest weighted average cost of capital (WACC) for the firm."

Required:

(i)Discuss the above statement based on the following theories:

lTraditional Theory;

lModigliani and Miller (No Tax); lModigliani and Miller (With Tax); lThe Pecking Order.

(16 marks)

(ii)Based on the answer in part 2(a)(i), in your opinion, which is the best capital structure theory? You are required to support your opinion with ANY TWO (2) reasons.

(5 marks)