Question 17

1)Explain, using a diagrammatical approach, the role of Trade-off Theory in searching for the optimal debt-to-equity ratio in a world with corporate tax and risky-debt.

2)Explain clearly why issuing shares would have the danger of driving down the share price.

3)Using Miller (1977) personal income tax model to explain the impact of personal taxes due to income from equity investment and income from debt interest payment on the company's optimal capital structure.