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4. Your firm is considering issuing one-year debt, and has come up with the following estimates of the value of the interest tax shield and
4. Your firm is considering issuing one-year debt, and has come up with the following estimates of the value of the interest tax shield and the probability of distress for different levels of d ebt Debt Level ( Million) PV(interest tax shield, $ million) Probability of Financial Distress 0 0 0.00% 20 0.50 0.10% 40 1.00 0.50% 60 1.50 1.25% 2.00 2.50% 100 2.50 6.00% 120 3.00 11.00% 140 3.50 25.00% Suppose tha t the a ppropriate discount rate for financial distress costs is 10%, which level of debt above is optimal if, in the event of distress, the firm will have distress costs equal to: $11 million [15 points) $31 million [15 points] a. b
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