A firm ‘Genius Group’ is a very young business whose revenues and earnings are both growing at 10 percent every year. Its total value of assets currently stands at £3 million, and a large part of it is intangible. Another firm ‘Alba Mills’, whose annual revenues and earnings are remaining stable at about £5 million and £1 million, respectively. Alba ‘s total value of assets is £7 million, which is mostly tangible. With this setup, answer the following questions. a) Assuming that the predictions of the pecking order theory hold, which firm is paying more dividends relative to earnings? Explain concisely why. [20 marks] b) Assuming that the predictions of the trade-off theory hold, which firm should have a higher debt-equity ratio? Explain concisely why.
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