Explain with an example the old view of capital structure. In your example assume: (1) an all-equity oil well company with earnings of $24M, beta of 2, and 10 M shares; (2) SML: k_e = 4% + [10%]beta; a change in capital structure brought about by management borrowing $50 million at 8% interest and buying up shares.

Explain the reasons underlying the old view of capital structure.

Using the above case, explain MMs proposition: V^A_L = Vu. In your explanation assume there is an LBO company which can borrow a maximum of $50 million at 8% interest.