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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
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: 6. 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. $1 million? b. $5 million? c. $30 million? a. $1 million? If distress costs are equal to $1 million, the optimal level of debt is $ million. (Round to the nearest integer.) (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) 0 0.00 0% PV (interest tax shield, $ million) Probability of Financial Distress Debt Level (in $ million) 50 60 70 0.95 1.14 1.33 1% 2% 7% 40 0.76 0% 80 1.52 16% 90 1.71 31%
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