3. UEtoile du Nord Resorts is considering various levels of debt. Presently, it has no debt and a total market value of $15 million. By undertaking leverage, it believes that it can achieve a net tax advantage (corporate and personal combined)

equal to 20 percent of the amount of the debt. However, the company is concerned with bankruptcy and agency costs as well as lenders increasing their interest rate if it borrows too much. The company believes that it can borrow up to $5 million without incurring any of these costs. However, each additional

$5 million increment in borrowing is expected to result in the three costs cited being incurred. Moreover, they are expected to increase at an increasing rate with leverage. The present-value cost is expected to be the following for various levels of debt:

Debt (in millions) $5 $10 $15 $20 $25 $30 PV cost of bankruptcy, agency, and increased interest rate (in millions) 0 .6 1.2 2.0 3.2 5.0 Is there an optimal amount of debt for the company?

1. The Malock Company has net operating earnings of $10 million and $20 million of debt with a 7 percent interest charge. In all cases, assume no taxes.