on list

Your firm is considering issuing one$-$year debt, and has come up with the following estimates of the value of the interest

tax shield and the probability of distress for different levels of debt: $.$ Suppose the firm has a beta of zero, so that the

appropriate discount rate for financial distress costs is the risk$-$free rate of $5\%.$ Which level of debt above is optimal if$,$ in

the event of distress, the firm will have distress costs equal to

a$.3$ million? b$.7$ million? c$.24$ million?Data table

$($Click on the following icon $$ in order to copy its contents into a spreadsheet.$)$