-3- QUESTION 3: NoRisk Limited currently has no debt. The firm's CEO Johnny Lever would like to determine the optimal capital structure. The following data are relevant for the analysis. EBIT is expected to be $10,000,000 per year for the next 15 years and after that it will decline at 1% per year forever. Present value of bankruptcy related costs = $20 million Tc = 40%, 1B = 5%, and I'o = 8% Probabilities of bankruptcy at different debt levels are as follows: Debt Level (in millions of dollars) $0 $10 $20 Probability of bankruptcy (%) 0 0 5 $30 10 $40 20 $50 30 $60 60 a. Determine the optimal level of debt. b. Determine the weighted average cost of capital at the optimal debt level. -3- QUESTION 3: NoRisk Limited currently has no debt. The firm's CEO Johnny Lever would like to determine the optimal capital structure. The following data are relevant for the analysis. EBIT is expected to be $10,000,000 per year for the next 15 years and after that it will decline at 1% per year forever. Present value of bankruptcy related costs = $20 million Tc = 40%, 1B = 5%, and I'o = 8% Probabilities of bankruptcy at different debt levels are as follows: Debt Level (in millions of dollars) $0 $10 $20 Probability of bankruptcy (%) 0 0 5 $30 10 $40 20 $50 30 $60 60 a. Determine the optimal level of debt. b. Determine the weighted average cost of capital at the optimal debt level