Assume the M&M model with corporate taxes and financial distress holds and that the CAPM

is true. Telecor Corporations Inc. $($TCI$)$ is a corporation financed with debt $($B$)$ and equity

$($S$).$ $$60$ million of its assets are financed by debt paying an effective annual return of $7\%,$

and the remainder with equity. TCI's earnings are subject to corporate taxes at a rate of $40\%.$

A financial analyst has estimated that if TCI were an all$-$equity, it would have a market value

of $$440$ million and that the return on investment in TCIs equity would be $18\%.$ The financial

analyst believes that there are costs of financial distress associated with debt, and they

estimate the present value of these costs to be:

$P{V}_{\text{C}\text{o}\text{s}\text{t}\text{s}of\text{f}\text{i}\text{n}\text{a}\text{n}\text{c}\text{i}\text{a}\text{l}\text{d}\text{i}\text{s}\text{t}\text{r}\text{e}\text{s}\text{s}}=\frac{B^2}{500}$

Both $B$ and the present value of financial distress are represented in millions of dollars in this

function.

The market value of TCI under its leveraged capital structure is:

a$)$ $$450$ million

b$)$ $$520$ million

c$)$ $$440$ million

d$)$ $$417$ million

e$)$ $$457$ million