Northern Physical Therapy currently has no debt. Using the 1963 Modigliani and Miller framework with corporate taxes and applying trade-off theory, Northern wishes to add debt to its capital structure in an amount that optimizes the value of Northern. Debt can be added in $500,000 increments with a maximum amount of debt of $2,500,000. The relevant data follows: $750,000 25% EBIT per year (in perpetuity) Tax rate Required return on equity of an unlevered company (R(Reu)) Present value of financial distress costs 15% $1,500,000 $1,000,000 6% 16.00% Debt Level $1,500,000 $2,000,000 $2,500,000 7% 8% 9% 16.50% 17.00% 17.50% 8% 16% 32% 4%) 1 $500,000 2 Required Return on Debt-R(Rd) 5% 3 Required Return on Equity - R(Re) 15.50% 4 Probability of Financial Distress 2% 5 6 What level of debt optimizes the value of Northern? (10 points) 7 B Northern Physical Therapy currently has no debt. Using the 1963 Modigliani and Miller framework with corporate taxes and applying trade-off theory, Northern wishes to add debt to its capital structure in an amount that optimizes the value of Northern. Debt can be added in $500,000 increments with a maximum amount of debt of $2,500,000. The relevant data follows: $750,000 25% EBIT per year (in perpetuity) Tax rate Required return on equity of an unlevered company (R(Reu)) Present value of financial distress costs 15% $1,500,000 $1,000,000 6% 16.00% Debt Level $1,500,000 $2,000,000 $2,500,000 7% 8% 9% 16.50% 17.00% 17.50% 8% 16% 32% 4%) 1 $500,000 2 Required Return on Debt-R(Rd) 5% 3 Required Return on Equity - R(Re) 15.50% 4 Probability of Financial Distress 2% 5 6 What level of debt optimizes the value of Northern? (10 points) 7 B