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Wilson Corporation is an unlevered company that owns assets with a market value of $5 million. The firm is considering a recapitalization that would involve
Wilson Corporation is an unlevered company that owns assets with a market value of $5 million. The firm is considering a recapitalization that would involve adding long-term debt and using the debt proceeds to repurchase shares. The CFO of Wilson Corporation has put together the following table with regards to the use of debt in the firms capital structure:
Amount of debt | PV of tax shield | Estimated PV of financial distress costs |
$1,000,000 | $350,000 | $160,500 |
$1,500,000 | $525,000 | $193,375 |
$2,000,000 | $700,000 | $341,500 |
$2,500,000 | $875,000 | $705,000 |
$3,000,000 | $1,050,000 | $1,021,000 |
Among the choices in the table, what is the optimal level of debt for Wilson Corporation?
A.) $1,000,000
B.) $1,500,000
C.) $2,000,000
D.) $2,500,000
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