1. Define optimal capital structure. What is the relationship between optimal capital structure, corporate value, and cost of capital? How does the concept of effective capital structure differ from optimal capital structure?

2. Some companies carry essentially no long-term debt and only a minimal amount of short-term debt in their capital structure. Often these firms are in the technology and biotechnology sectors. Provide an explanation for why well-managed and profitable companies in these sectors appear to undervalue the benefits associated with an optimal capital structure.