Your firm currently has $45 million in debt outstanding and has a 15% probability of bankruptcy. You are considering permanently increasing the firms debt level by $25 million, after which you expect the annual cost of debt to be 15% and the probability of bankruptcy to be 35%. How does this change in leverage affect firm value if the expected tax rate is 25% and the present value of expected costs given bankruptcy are $5 million (assume that neither the tax rate nor the costs given bankruptcy depend on leverage)?

Decrease by $5.75 Million

Increase by $5.75 Million

Increase by $5.25 Million

Decrease by $5.25 million

None of the other answers