Assume that there are taxes, all interest expense is tax deductible, there are costs of financial distress, but otherwise, markets are perfect. ABC Corp is a 100% Equity financed firm with a market capitalization of equity of $10 Billion. The present value of the costs of financial distress are 30% of the value of the levered firm. Assume that any debt that ABC Corp issues will remain constant in perpetuity. If ABC Corp faces a 21% corporate tax rate, which capital structure choice should they make? Choice 1 2 3 4 5 O Choice 2 O Choice 4 O Choice 3 O Choice 1 O Choice 5 Debt to Issue $0 B $1.5 B $3 B $4.5 B $6 B Cost of Debt 4.96% 5.65% 6.78% 8.79% Probability of Distress 0% 5% 12% 18% 30%