A company is considering adding leverage to its capital structure. The company's managers believe they can...

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A company is considering adding leverage to its capital structure. The company's managers believe they can add as much as $35 million in debt and exploit the benefits of the tax shield. However, they also recognize that higher debt increases the risk of financial distress. Based on simulations of the firm's future cash flows, the CFO has made the following estimates in millions of dollars: Debt level 0 10 PV(Interest tax shield) 0.00 1.50 PV(Financial distress costs) 0.00 0.00 The tax rate is 15%. What is the optimal debt choice for the company? 20 3.00 0.38 25 30 3.75 4.50 1.62 4.00 35 5.25 6.38 ↑ A company is considering adding leverage to its capital structure. The company's managers believe they can add as much as $35 million in debt and exploit the benefits of the tax shield. However, they also recognize that higher debt increases the risk of financial distress. Based on simulations of the firm's future cash flows, the CFO has made the following estimates in millions of dollars: Debt level 0 10 PV(Interest tax shield) 0.00 1.50 PV(Financial distress costs) 0.00 0.00 The tax rate is 15%. What is the optimal debt choice for the company? 20 3.00 0.38 25 30 3.75 4.50 1.62 4.00 35 5.25 6.38 ↑

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To determine the optimal debt level for the company we need to find the debt level that maximizes th... View the full answer