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Answer the following questions about capital structure. a. In the Modigliani-Miller theorem, we assume that...

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Answer the following questions about capital structure. a. In the Modigliani-Miller theorem, we assume that markets are free from certain frictions. For example, we assume that there is no tax. List two types of other frictions rather than zero tax. [2 marks] b. Assume that we are in perfect capital markets. One of your fellow students noticed that the debt cost of capital is lower than the equity cost of capital. He suggested that his company could reduce the cost of capital by borrowing more. Is his suggestion valid? Explain. [3 marks]

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