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Non-Alpha Only MCQ Sheets provided 12. (a) You are invested in a firm that is currently financed solely with equity. However, the managers are now going to be introducing debt into the firm's capital structure. Explain what you will need to do to maintain an unlevered position in this firm (according to Modigliani & Miller's Proposition Iewithout taxes [9 marks] (b) A firm is currently unlevered and valued at $640,000. The managers are now deciding whether or not introducing debt into the firm's capital structure would increase its value, The firm's current cost of equity is 12%/ Under consideration is the issuing of $300,000 of debt with a cost of debt of 8% together with the repurchasing of $300,000 of equity from the proceeds of the debt issue. Required: (i) If the managers decide to change the firm's capital structure in this way, what will be its new value, cost of equity, and overall cost of capital (according to Modigliani & Miller's propositions without taxes)? (Show all workings). [8 marks] (ii ) Explain how, and why, your answers to (i) would change if corporate taxes, only, were to be introduced (according to Modigliani & Miller's propositions with corporate taxes). [8 marks] M Total: 25 marks