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.

The Chief Financial Officer (CFO) of the ABC Company is interested to identify the cost of capital and value of the company. Currently, the ABC is an all-equity company. Earnings before interest and taxes (EBIT) for the company is expected to be $71,047 forever, and the cost of capital is currently 14.30 percent. The corporate tax rate applicable to this company is 32.8 percent.

Required (max 200 words)

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

Requirement-A. explain which of these models would be applicable to that company. (2 pts)

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. (2pts)