Explain with an example the old view of capital structure. In your example assume: (1) an all-equity oil well company with earnings of $12 million, beta of 2, and 10 million shares; (2) SML: k_e = 4% + [10%]b; a change in capital structure brought about by management borrowing $25 million at 8% interest and buying up shares. Explain the reasons underlying the old view of capital structure and the problems with the theory.

Using the same example, explain MMs proposition: V^A_L = Vu. In your explanation assume there is an LBO company that can borrow a maximum of $25 million at 8% interest.