Question

In: Finance

Your firm is considering issuing​ one-year debt, and has come up with the following estimates of...

Your firm is considering issuing​ one-year debt, and has come up with the following estimates of the value of the interest tax shield and the probability of distress for different levels of​ debt:

Debt Level​ (in $​ million)

0

40

50

60

70

80

90

PV​ (interest tax​ shield, $​ million)

0.00

0.76

0.95

1.14

1.33

1.52

1.71

Probability of Financial Distress

0%

0%

1%

2%

7%

16%

31%

Suppose the firm has a beta of​ zero, so that the appropriate discount rate for financial distress costs is the​ risk-free rate of 5%. Which level of debt above is optimal​ if, in the event of​ distress, the firm will have distress costs equal to

a. ​$2 ​million?

b. ​$5 ​million?

c. ​$30 ​million?

Solutions

Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE


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