Your firm currently has no debt and a marginal tax rate of 40%. You are contemplating issuing a one-year bond to pay your shareholders a one-time dividend, but you are unsure how much debt to issue. After one year you will repay the debt.

However, depending on how much debt you issue you will face a different interest rate and a different probability of financial distress (see table below). If you experience financial distress you expect the present value of distress costs to be $10 million. Assume that there are no agency benefits and no agency costs associated with this transaction. How much debt should you issue?

	Estimates under Different Debt Levels
Debt Principal in $ millions	0	40	60	80	90
rD	0	3.50%	4%	4.50%	5%
Probability of Financial Distress	0.0%	0.0%	1.0%	5.0%	9.0%