You are expected to discuss and elaborate the following: Theoretical arguments: - MM capital structure irrelevance in perfect world - MM with corporate taxes

And real world influences.

The managing director of your firm is thinking aloud about an appropriate debt level for the company: "The consultants I spoke to yesterday explained that some academic theorists advance the idea that, if your objective is the maximization of shareholder wealth, the debt to equity ratio does not matter. However, they did comment that this conclusion held in a world of no taxes. Even more strangely, these theorists say that in a world with tax it is best to "lever-up" a company as high as possible. Now I may not know much about academic theories but I do know that there are limits to the debt level which is desirable. After listening to these consultants I am more confused than ever." You step forward and offer to write a report for the managing director, both outlining the theoretical arguments and explaining the real world influences on the capital structure of firms