Imagine a world with perfect certainty, no costs of financial distress and where the corporate tax rate is Epsilon LTD has annual earnings before interest and taxes EBIT of Interest rates on its debt are and will be so forever. How much debt and equity in should it have if it wanted to achieve its optimal capital structure?

Now imagine another firm in the same world, Theta LTD where EBIT are also at date and nothing at date ; today but are growing at percent per year so EBIT will be at date and so on How much debt and equity in should it have today if it wanted to achieve its optimal capital structure?