The latest financial statement of Perfect plc includes the following financing sources:

Perfect plc financial statement shows the following financing sources:

Equity finance
570,000 ordinary shares at ($1 par value)	570,000
Reserves	100,000
Non-current liabilities
400 bonds @8% ($1,000 par value)	400,000

The stock price of Perfect is currently traded at $2 and the bonds are traded at a discount 95% of the par value with yield-to-maturity equal to 8.5%. The firms market value weighted average cost of capital is 16.52%. Assume that the corporate tax rate for Perfect is 25%.

Questions:

1. If the firms Debt-to-Equity ratio increases to 100 percent, estimate the cost of capital that will be used to evaluate a new project with the same level of risk with the company.

2. Discuss the optimal capital structure according to Modigliani and Millers theory of capital structure in a world with no taxes.

3. Discuss the optimal capital structure according to Modigliani and Millers theory of capital structure in a world with corporate taxes.

4. Discuss the optimal capital structure in a world with corporate taxes, financial distress and agency costs.