Problem 3 KCS company had debt outstanding of $985 million and 40 million shares trading at $46.25 per share in the past month of March. It earned $203 million in EBIT, and faced a marginal tax rate of 36.56 percent. The firm was interested in estimating its optimal leverage using the APV approach. The following table summarizes the estimated bond ratings and probabilities of default at each level of debt from 0 percent to 90 percent. probability of default 0.28% 10% 0.28% 20% Debt ratio bond rating 0% AAA AAA AAA 30% BB 40% B- 50% CCC 60% 70% 80% 90% D 1.41% 12.20% 32.50% 46.61% 65% 80% 80% 100% The direct and indirect bankruptcy costs are estimated to be 25 percent of the firm value. Estimate the optimal debt value of KCS, based on levered firm value. 463