Question: A. Explain why the reward-to-risk ratio must be equal for all securities if the financial markets are efficient (law of one price). B. Draw the

A. Explain why the reward-to-risk ratio must be equal for all securities if the financial markets are efficient (law of one price).

B. Draw the following three graphs: First, you need to plot the value of the firm on the vertical axis and the total debt on the horizontal axis. Use this graph to illustrate the value of a firm under

1) M&M without taxes

2) M&M with taxes, and

3) the static theory of capital structure (with M&M with taxes and bankruptcy costs).

Briefly explain in words what these three graphs reveal about the capital structure

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