The shareholders of Company B are concerned that the company has taken on too much debt and have come to you for advice. The company's unleveraged value is $7,000,000, and it recently borrowed $2,000,000. In the event that the company goes bankrupt, bankruptcy costs have been estimated at $1,000,000. If the probability of bankruptcy is 15%, and the company pays tax at 40% calculate the value of the firm and advise the shareholders accordingly.

Answer rating: 100% (QA)

To calculate the value of the firm we need to use the concept of enterprise value which is the sum of the equity value and the debt value First lets c... View the full answer