1. ACCM Inc. is considering adding leverage to its capital structure. The firms managers believe they can issue more debt to exploit the tax benefit of leverage. However, they also recognize that higher debt increases the risk of financial distress. Based on simulation of the firms future cash flows, the managers have made the following estimates (in millions of dollars) for different levels of debt (%) in the firm capital structure.

   Debt level	10%	20%	30%	40%	50%
   PV(Interest tax shield)	1	2.5	3.75	4.5	5.25
   PV(Financial distress cost)	0.5	0.75	2.25	3.1	6.25

   The optimal capital structure (debt level) of the firm is closest to:

   	A.	30%
   	B.	50%
   	C.	20%
   	D.	40%