a) Capital structure is the proportion of debt and equity financing of a firm. It indicates how the company operation of a business is financed. There are several theories that have been discussed in the literature regarding capital structure. Explain what is capital structure. Compare and contrast Pecking Order Theory and Asymmetric Information Theory.

b) Assume that both Ahmad & Co. and Ali & Co. plot on the Security Market Line (SML). Ahmad & Co. has a beta of 2.6 and an expected return of 23.1%. Ali and Co. has a beta of 0.90 and an expected return of 8.3%. The expected return on the market portfolio is 11% and the risk-free rate is 4%. If you wish to hold a portfolio consisting of Apple and Yahoo and have a portfolio beta equal to 1.5, calculate the proportion of the portfolio must be in Ahmad and Co.? Using the Capital Asset pricing Model (CAPM) calculate the required rate of return that investors could earn.