Modigliani and Miller developed a theory describing a firms optimal capital structure, ranging from a basic model assuming no corporate taxes, to an intermediate model including corporate taxes, and ultimately a model providing for costs of financial distress.

Required (max 200 words)

Explain only using your OWN WORDS (plagiarism would be checked):

The Chief Financial Officer (CFO) of the C4U Company is interested to identify the cost of capital and value of the company. Currently, the C4U is an all-equity company. Earnings before interest and taxes (EBIT) for the company is expected to be $70,745 forever, and the cost of capital is currently 14.83 percent. The corporate tax rate applicable to this company is 31.7 percent.

Requirement-A. Consider the situation above, and explain which of these models would be applicable to C4U Company.

Requirement-B Give examples of the type of practical companies where each of these three models would be applicable. Justify your answer. The explanation of the model is NOT required.