Your firm is considering issuing one-year debt, and has come up with the following estimates of the value of the interest tax shield and the probability of distress for different levels of debt:

0 40 50 60 70 80 90 PV (interest tax shield, $ million) 0.00 0.76 0.95 1.14 1.33 1.52 1.71 Probability of Financial Distress 0% 0% 1% 2% 7% 16% 31%

. Suppose the firm has a beta of zero, so that the appropriate discount rate for financial distress costs is the risk-free rate of

5%.

Which level of debt above is optimal if, in the event of distress, the firm will have distress costs equal to a.

$2

million?b.

$5

million?c.

$25

million?

a.

$2

million?If distress costs are equal to

$2

million, the optimal level of debt is

$nothing

million. (Round to the nearest integer.)