03: OTC firm has $2.5 million in excess cash. This firm plans to use the cash either to retire all the outstanding debt, or to repurchase equity. The firm's debt is held by one institution which will be willing to sell it back to OTC for $2.5 million. This firm will not charge OTC any transaction costs. Once OTC becomes an unlevered firm, it will remain unlevered forever. If OTC does not retire the debt, the company will use the $2.5 million cash in repurchasing some of stocks from the open market without transaction cost. The firm will generate $1.3 million of annual earnings before interest and taxes in perpetuity regardless of its capital structure. The firm will pay out all earnings as dividends at the end of each year. OTC is subject to a corporate tax rate of 21% and the required rate of return for the unlevered equity is 20%. The personal tax rate on interest income is 25% and there is no tax on equity distribution. Assume there is no bankruptcy costs. e a) What is the value of OTC if it chooses to retire all of its debt and become an unlevered firm? b) What is the value of OTC if it decides to repurchase stocks instead of retiring its debt? C) Assume that expected bankruptcy costs have a present value of $400,000. How does this influence OTC's decision (ie, with the existence of bankruptcy cost, will the firm choose to use levered or unlevered capital structure)