ABC Corporation has 12 million shares outstanding, now trading at 65 per share. The firm has estimated the expected rate of return to shareholders at about 15%. It has also issued 5-year bonds of 400 million at an interest rate of 8%. It pays tax at a marginal rate of 35%.

Requirements:

1. What is ABC's after-tax WACC?

2. Compute the present value of interest tax shields generated by the 5-year bonds

3. A customer has ordered goods from ABC generating a present value of 4,500. The present value of production costs is 3,000. Assuming there is no possibility of repeat orders, what is the minimum level of P (probability that the customer will pay up) at which ABC is justified in extending credit?

4. How is Modigliani-Miller's Proposition I modified when taxes and financial distress costs are considered?