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

question 248

Essay

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.

---

Definitions:

Shortage Costs

Expenses incurred when demand exceeds supply, often leading to lost sales or higher production costs.

Weighted Average Delay

The average delay time for all items being processed, taking into account the proportion that each item contributes to the total amount.

Collection Delay

The time lag between when a payment is made by a customer and when the funds become available to the recipient company.

Average Amount

The mean value obtained by dividing the sum of all amounts by the number of amounts, often used to determine the typical value in a set of data.