very urgent

(b) The Bio Company currently has no debt. An in-house research group has just been assigned the job of determining whether the firm should change its capital structure, Mr. Kagiri, who has a good knowledge of capital market conditions and is confident of his ability to predict the firm's debt and equity costs at various levels of debt, has decided to estimate the optimal capital structure using the traditional theory whereas Ms. Mwangi who is well versed with modern finance theory has decided to carry out the analysis using the MM framework. The following data are relevant to both analyses. Earnings before interest and taxes = Shs 4 million per year in perpetuity. Tax rat = 40% Current required rate return on equity = 12% The cost of capital schedule predicted by Mr. Kagiri follows: At a Debt level of (Millions of shillings) Shsom Shs.2 Shs.4 Shs.6 Shs.8 Shs.10 Shs. 12 Shs. 14 Interest rate (%) 8.0 8.3 9.0 10.0 11.0 13.0 16.0 Cost of equity 12.0 12.25 12.75 13.0 13.15 13.4 14.65 17.0 Ms. Mwangi estimated the present value of distress costs at shs. 8 million. In addition she estimated the following probabilities of financial distress. At a Debt level of (Millions of shillings) Shs0m Shs 2 Shs.4 Shs.6 Shs.8 Shs. 10 Shs.12 Shs.14 0 0.05 0.07 0.10 ON 0.47 0.90 Probability of financial distress Required: What level of debt would Mr. Kagiri and Ms. Mwangi recommend as optimal? (14 marks)