Harrys Potter's yearly earnings depend on the local weather conditions. If the weather over the year is good (which happens with a probability of .4), Harrys Potter's pre-tax earnings are high and are equal to $1.4m for the year. If instead local weather turns out to be on average fair (which happens with probability .3), Harrys Potter's pre-tax earnings are only $1.1m. Finally, if average weather is bad (which happens with probability .3) pre-tax earnings are only $.8m. All of Harrys Potter's risk is therefore non-systematic. In addition, for tax purposes, Harrys Potter has depreciation deductions every year of $.4m. The corporate tax rate is C=35%, the personal tax rate on equity income is E=14%, and the personal tax rate on interests P = 28%. The rate on tax-free bonds is r 0=7%. How much debt should Harrys Potter have in its capital structure?

This question does not need more information according to the professor. Using the probabilities and the given info the answer can be calculated. It's based on the debt levels and the tax benefit of debt.