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QUESTION 7. You get an internship at a French firm called Totally Inefficient Corporation, or TIC. TIC is trying to determine its optimal capital structure. It can issue debt or equity in Thailand, denominated in Thai baht (THB). It can also issue debt or equity in London, denominated in pounds (GBP). TIC is considering two options: (1) 30% equity and 70% debt; and (2) 70% equity and 30% debt. You don't expect the choice of the higher debt share to affect the costs of debt and equity listed below. The firm's marginal tax rate is zero. You believe the International Fisher Effect is the best way to compare rates of return in different currencies. You observe the following variables: London (GBP) Risk-free rate Credit spread for TIC's bond Expected stock market return TIC's market beta UK expected annual inflation rate 2% 4 percentage points 4% 1.75 1% Thailand (THB) Risk-free rate Credit spread for TIC's bond Expected stock market return TIC's market beta Thai expected annual inflation rate 7% 5 percentage points 9% 1.0 5% a. Please compare the financing options available to TIC. Where should TIC issue debt? Where should TIC issue equity? Which capital structure should TIC choose?| b. Suppose that a severe recession hits Thailand, the central bank cuts interest rates, and the Thai risk-free rate falls to 3%. Nothing else changes. Now, where should TIC issue debt? where should TIC issue equity? Which capital structure should TIC choose

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