a. Provide and explain two evidence that support the trade-off theory.
b. Provide and explain two evidence that do NOT support the trade-off theory.
c. Explain four solutions that can be used to reduce agency problems in a corporation.
d. River Island has a debt-equity ratio of 2.0. The firm's weighted average cost of capital is 12%, and its pre-tax cost of debt is 8%. River Island is subject to a corporate tax rate of 30%. Explain how increasing debt in capital structure will affect WACC. What would River Island's weighted average cost of capital be if the firm's debt-equity ratio were 0.8?
