Question
Please describe the optimal capital structure (D/E ratio) based on following different assumptions, and also describe the change of cost of equity, cost of debt
Please describe the optimal capital structure (D/E ratio) based on following different assumptions, and also describe the change of cost of equity, cost of debt and WACC when the firm changes its capital structure under three different assumptions as follows. (Please use both figure and writing to answer the questions)
(1) Modigliani & Miller (MM) world (perfect capital market)
(2) Modigliani & Miller Theory (perfect capital market) with corporate tax as the only market imperfection
(3) Modigliani & Miller Theory (perfect capital market) with corporate tax and bankruptcy costs
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