a. What do we mean by asymmetric information? Why do all firms prefer internal financing first? (4 marks)

b. What is meant by a company's debt capacity? If equity financing were cheaper than debt financing and a company had debt capacity which of the two forms of financing would you recommend and why? (4 marks)

c. In a world of taxes and no bankruptcy, why is a company's optimal capital structure all debt? What happens when a company adds bankruptcy to the world of taxes with regard to the optimal capital structure? (5 marks)

d. The Fast-Track Co. has thus far only used equity to finance its operations and currently has 1,000,000 shares outstanding with an EBIT of $1,500,000.The newly-hired CFO firmly believes that the firm would benefit its shareholders a great deal by issuing $10,000,000 of debt at the rate of 10% per year and buying back 400,000 shares.If interest is tax-deductible, the firm is being charged a rate of 10% interest on borrowed funds, and the firm is in a 35% tax bracket, is the new CEO correct?Assume that the firm's operating income will remain the same irrespective of its capital structure. (7 marks)