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Home Work-1 Question No.1. a. What are business risk and financial risk? How does each of them influence the firm’s capital structure decisions? b. How does asymmetric information affect the firm’s capital structure decisions? c. What important factors in addition to quantitative factors should a firm consider when it is making a capital structure decisions? d. NNN Company has collected the following data with respect to its capital structure, expected earnings per share, and required return. Capital structure debt ratio Expected earnings per share Required return, k 0% Tk.3.12 13% 10% Tk.3.90 15% 20% Tk.4.80 16% 30% Tk.5.44 17% 40% Tk.5.51 19% 50% Tk.5.00 20% 60% Tk.4.40 22% Required: a. Compute the estimated share value associated with each of the capital structures. b. Determine the optimal capital structure on the basis of (1) maximization of expected earnings per share and (2) maximization of share value. c. Which capital structure do you recommend? Why? Question No.2. a. Contrast the basic arguments about dividend policy advanced by Miller and Modigilani s

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