Question
ACCM Inc is considering adding leverage to its capital structure. The firm's managers believe they can issue more debt to explot the tax benefit
ACCM Inc is considering adding leverage to its capital structure. The firm's managers believe they can issue more debt to explot the tax benefit of leverage. However, they also recognize that higher debt increases the risk of financial distress. Based on simulation of the firm's future cash flows, the managers have made the following estimates (in millions of dollars) for different levels of debt (%) in the firm capital structure Debt level PV(interest tax shield) PVF wancial distress cost) 10% " 05 The optimal capdal structure (detil level) of the Sem is closest to CA.50% OB.20% 8C409 00.30% 20% 30% 40% 50% 25 3.75 45 5.25 075 225 31 625
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