Discuss whether the work performed by your colleague can help you to decide on the optimal capital structure.

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Discuss whether the work performed by your colleague can help you to decide on the optimal capital structure.

Determine the current fair value of the company (if the policy of having no debt is continued), and the expected increase in fair value if the debt-to-value ratio is increased to 30%. In this part of the assignment, you may assume that the Modigliani-Miller assumptions hold true.
(b) Explain how a shareholder currently holding (say) 1,000 shares in the company can ‘undo’ the proposed leverage.
Discuss whether the work performed by your colleague can help you to decide on the optimal capital structure.
In light of the theories of capital structure that you have covered in the course, do you think your colleague’s suggestion represents a sensible approach to capital structure planning? In answering this part of the question, please outline and discuss capital structure theories that you feel may be relevant, and specify the circumstances under which you feel such theories are most relevant.