Wild Berry (WB) will remain in business for one more year. At the end of next year, the rm will generate a liquidating cash ow of $370M in a boom year and $150M in a recession year; both states are equally likely. The cost of equity for the unlevered rm is rU = 10%. The rm's outstanding debt matures in a year and has a market (and book) value of $150M today. The interest payment on this debt is $15M at the end of next year. The corporate tax is c = 35%. Corporate taxes is the only relevant market imperfection.

If the discount rate for the interest tax shield is rITS = 5%, the value of the interest tax shield (PV (ITS)) is: (A) $ 2.5M Correct (B) $ 5.0M (C) $ 6.0M (D) $ 7.5M

The Yield of Maturity (Y TM) of a rm's debt could be very dierent from the cost of debt (rD): (A) because rms pay taxes, which distorts the true cost of debt. (B) when rms are in nancial distress. Correct (C) and in general Y TM < rD. (D) only when direct costs of bankruptcy are substantial.

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