Question 3 Disaster & Co., is an unlevered company, whose shareholders plan to issue a bond, to repurchase equity and exploit potential tax advantages of debt. 1. Suppose that the costs associated with default are virtually non-existent: is there a case for not recapitalising the company? Carefully explain the logic of your argument. 2. Suppose now that the company has proceeded with the initial recapitalisation, and that following the initial debt issuance, it has increased its leverage to a very high level. Provide two reasons why the use of additional leverage in the present situation can be detrimental to the value of the company. Carefully explain the logic of your argument. 18 marks