AVX Corp. (NYSE: AVX), a leading manufacturer and supplier of electronic components, currently has no debt outstanding and a market value of $2.27 billion. They are considering changing their capital structure to take advantage of the interest tax shield.

Part 2 of 3: Tradeoffs in Capital Structure AVX Corp. M SE: AVX), a leading manufacturer and supplier of electronic components, currently has no debt outstanding and a market value of $2.27 billion. They are considen'ng changing their capital structure to take advantage of the interest tax shield. However, the management is concerned about nancial distress costs, so they want to evaluate the tax-bankruptcy tradeoff. AVX's EBITDA over the last 12 months is $200 million. You also have the following information on average default rates, average nancial ratios, and interest rates by credit rating. Assume a risk-free rate of 2%. _____E- Annualized default 0.05% 0.09% 0.20% 0.40% 1.07% 3.66% rate EBI'I'DA interest 1 6 13 6.75 4.25 3.25 2.25 coverage ratio 2.31% 2,35% 2.62% 3.22% 4.32% 6.30% 3. Use the information above to determine how much debt AVX should issue if they want to achieve a credit rating of "A." Assume any cash raised by issuing debt will be paid out to equity holders. 4. If AVX targets an "A" credit rating, what is the net value impact from leverage? Write down any formulas you use. Use the following assumptions: Debt will be kept at a xed dollar amount and rolled over perpetually. AVX Will be able to fully utilize interest tax shields each year. Corporate tax rate is 25%. If the rm defaults, they will incur nancial distress oosts of approximately 15% of rm value (use the current unlevered market value). If the annualized default rate is p and the nancial distress costs when defaulting is c and the discount rate is I} , then the present value of expected distress costs can be computed as PV[E(distress costs)] = ( p ) ac c. p'l'T'f 5. What is the optimal credit rating for AVX