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For BBB Co., the cost of financial distress conditional on bankruptcy is $20 million. The firm is choosing how much one-year debt to issue, and has narrowed it down to $32, $52, or $79 million. The firm's choice of debt will determine the likelihood of bankruptcy. Specifically, the probability of bankruptcy is 0.01, 0.02, and 0.05, respectively, corresponding to the three debt options. No interest tax shield is received in bankruptcy. Assume a corporate tax rate of 26%, and a discount rate of 0%. a. What is the expected cost of financial distress (in millions of dollars) if the firm chooses $52 million in one-year debt? $ million (Enter your answer rounded to three (3) decimal places.) b. What is the expected value of the one-year interest tax shield (in millions of dollars) if the interest rate on debt is 4.0% and the firm chooses $52 million in one-year debt? $ million (Enter your answer rounded to three (3) decimal places.) C. At what interest rate on debt is the expected cost of financial distress equal to the I expected one-year interest tax shield if the firm chooses $79 million in one-year debt? Note: solve this value algebraically rather than using Solver (the Solver answer may not be precise enough to be considered correct). (Enter your answer as a decimal (not as a percent) rounded to four (4) decimal places.) For BBB Co., the cost of financial distress conditional on bankruptcy is $20 million. The firm is choosing how much one-year debt to issue, and has narrowed it down to $32, $52, or $79 million. The firm's choice of debt will determine the likelihood of bankruptcy. Specifically, the probability of bankruptcy is 0.01, 0.02, and 0.05, respectively, corresponding to the three debt options. No interest tax shield is received in bankruptcy. Assume a corporate tax rate of 26%, and a discount rate of 0%. a. What is the expected cost of financial distress (in millions of dollars) if the firm chooses $52 million in one-year debt? $ million (Enter your answer rounded to three (3) decimal places.) b. What is the expected value of the one-year interest tax shield (in millions of dollars) if the interest rate on debt is 4.0% and the firm chooses $52 million in one-year debt? $ million (Enter your answer rounded to three (3) decimal places.) C. At what interest rate on debt is the expected cost of financial distress equal to the I expected one-year interest tax shield if the firm chooses $79 million in one-year debt? Note: solve this value algebraically rather than using Solver (the Solver answer may not be precise enough to be considered correct). (Enter your answer as a decimal (not as a percent) rounded to four (4) decimal places.)
