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Question Five - Capital structure (10 marks) 1)Modigliani and Miller (MM) (1961) argue the value of firm is determined solely by the earning power of the firm's assets, and any payout policy will do for shareholders." Do you agree with this statement? Explain. (3 marks) 2) XYZ Pty Ltd wants to finance $100,000, with the following two arrangements. The assets are expected to generate earnings before interest of $13,000 per annum in perpetuity, calculate the rate of return to shareholders. a) Capital structure -all equity (2 marks) b) Capital structure -30% equity and 70% debt with the interest rate of 10% per annum (3 marks) c) Illustrate the effect of financial leverage in part b) (2 marks)