i)While arranging capital for their business some managers follow the pecking order theory, can you explain what pecking order theory is and why managers choose such a theory to raise capital?

ii)Calculate the rate of return available to shareholders for a company financing $1 million of assets with the following three arrangements:

a.All equity

b.50% equity, and 50% debt at an interest rate of 12% per annum.

c.25% equity, and 74% debt at an interest rate of 12% per annum.

The assets are expected to generate earnings before interest of $150,000 per annum in perpetuity.

iii) What are the potential advantages and disadvantages to a company's shareholders if the company increases the proportion of debt in its capital structure?