Suppose the president of the company in the previous problem stated that the company should increase the amount of debt in its capital structure because of the tax-advantaged status of its interest payments. His argument is that this action would increase the value of the company. How would you respond?

Data from Previous Problem

Hominy, Inc., has debt outstanding with a face value of $2.15 million. The value of the firm if it were entirely financed by equity would be $11.4 million. The company also has 195,000 shares of stock outstanding that sell at a price of $47 per share. The corporate tax rate is 21 percent. What is the decrease in the value of the company due to expected bankruptcy costs?