For a particular firm, the value of its debt is $3,000 and the expected free cash flow
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For a particular firm, the value of its debt is $3,000 and the expected free cash flow on all future dates forever is $900. Given the firm’s risk exposure, the unlevered cost of equity capital is 14.90%. The corporate tax rate is 33.00%. Distress cost is modeled as a quadratic function – specifically, as 0.00009 times debt squared. Plot the value of an unlevered firm, the value of a levered firm with a tax shield, and the value of a levered firm with a tax shield and distress cost against the amount of debt.
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