1. Night Inc. has unlevered cash flows of $1,470,000 each year in perpetuity. The unlevered cost of capital (r_u) is 14%. The firm plans to issue $6 million in perpetual debt with a return of 8% (to repurchase stock). The tax rate is 25%. If the value of the levered firm is $11,500,000, use the trade-off theory to find the present value of the financial distress costs.

Unless stated otherwise, compounding is annual and payments occur at the end of the period.