Question One

(a)

State the necessary assumptions for the Modigliani and Miller (1963) propositions

(4 marks)

(b)

Derive the MM (1958) proposition II:

RS = RO+ (B / S) (RO-RB)

(7 marks)

(c)

Briefly discuss three important factors that influence a company's choice of target debt

equity ratio.

(5 marks)

(d)

What are agency costs? Of what significance are they in capital structure decisions?

(9 marks)

(4 + 7 + 5 +9 = 25 marks)