Draw the following two graphs, one above the In the top graph, plot ﬁrm value on the vertical axis
and total debt on the horizontal. Use the graph to illustrate the value of a ﬁrm under M&M without
taxes, M&M with taxes, and the static theory of capital structure. On the lower graph, plot the WACC
on the vertical axis and the debt/equity ratio on the horizontal axis. Use the graph to illustrate the
value of the ﬁrm's WACC under M&M without taxes, M&M with taxes, and the static theory. Brieﬂy
explain what the two graphs tell us about ﬁrm value and its cost of capital under the three different
theories.

Question

Quizplus · Accepted Answer

The Answer of Draw the following two graphs, one above the In the top graph, plot ﬁrm value on the vertical axis
and total debt on the horizontal. Use the graph to illustrate the value of a ﬁrm under M&M without
taxes, M&M with taxes, and the static theory of capital structure. On the lower graph, plot the WACC
on the vertical axis and the debt/equity ratio on the horizontal axis. Use the graph to illustrate the
value of the ﬁrm's WACC under M&M without taxes, M&M with taxes, and the static theory. Brieﬂy
explain what the two graphs tell us about ﬁrm value and its cost of capital under the three different
theories.

Draw the Following Two Graphs, One Above the in the Top