1. The Zakuta Fish Company is in a cyclical, risky business. By maintaining liquidity, it lowers the possibility of going into bankruptcy. It is estimated that if bankruptcy were to occur, there would be a $100,000 present-value shortfall in what suppliers of capital would realize from the going concern value of the assets.

This "cost" of bankruptcy is attributable to legal expenses and the sale of assets at distress prices. By maintaining the following levels of liquidity, the probabilities of bankruptcy occurring are:

Chapter 14 L i q u i d i t y , C a s h , and Marketable S e c u r i t i e s 443 Probability level of Liquidity of Bankruptcy Liquidity is increased by borrowing, and it is held in the form of marketable securities. Marketable securities yield less than the interest rate the company must pay on short-term borrowings. The present-value differential amounts to

$1,500 for each $25,000 borrowed. If we assume no taxes and no other explicit or implicit costs associated with debt, what is the optimal level of liquidity?