Modern capital structure theory, constructed by Modigliani and Miller, began in 1958 and provided justifications for increasing leverage under certain assumptions. CEOs and CFOs were encouraged to adopt this theory into practice, especially when spending is high and the risk of servicing debt is low. As capital markets have evolved, it is critical to understand the context and assumptions under which this model was created. Review the situation and answer the questions that follow: An analyst has graphed the relationship between the expected return on a firm's capital and its debt-equity (D/E) ratio. Her graph follows: RATES OF RETURN (Percent 20 18 16 14 12 10 Equity WACC rDebt 0.5 1 0 DEBT-EQUITY ID/E) RATIO 2.0