Question: Your firm is considering issuing one year debt and has come

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:

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. $25million?

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  • CreatedAugust 06, 2014
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