A company has an unlevered equity cost of capital of 12%. It expects to earn an EBIT of $120,000 each year in perpetuity. The corporate tax rate is 30%. The company has perpetual debt out- standing equal to $650,000. If the firm has 20,000 shares outstanding with a market price of $10 per share, what is the present value of financial distress costs? (A) $30,000 (B) $45,000 (C) $60,000 (D) None of the above

SOLUTION: B