Two corporations consider obtaining debt financing for a business expansion.Firm A is a mid-cap corporation that produces software and IT services, and hasbeen quite successful in the market over recent years. Firm B is a smallcorporation that operates a new chain of food stores, which have a rather stable,though moderate, profit margin. Both firms are in the same corporate tax bracket.

1. (8 points)Explain which firm is more likely to have a higher debt ratio according to each ofthe following theories

a. The Modigliani and Miller theory with corporate taxes

b. The pecking order theory

c. The trade-off theory