Corporate finance

ABC, Inc. is a company that so far has not taken on any debt at all. ABC has 3 million shares outstanding, each trading at $25 per share. The corporate tax rate is 40%. Suddenly ABC management decides that they should take on some debt. ABC is considering three possible debt levels: $20 million of debt, $40 million of debt or $60 million of debt. In either case, ABC will use the proceeds from the debt issue to buy back shares, and expects to keep the debt at a constant level forever. Capital markets are efficient and the yield that ABC have to promise investors for the different debt levels is equal to 5% for the lowest debt level, 7% for the intermediate debt level, and 9% for the highest debt level. A disadvantage of ABC taking on debt is that it may enter financial distress at any point in the future. If distress happened, it would cost the company $6 million. ABC estimates that the likelihood of financial distress would be 2% for the lowest debt level, 6% for the intermediate debt level and 8% for the highest debt level. The discount rate to be used for these distress costs has been estimated to be 2%. b. Compute the firm value of ABC under each of the three scenarios. What debt level should ABC choose