Investors are risk neutral, and the risk-free interest rate is 0. Suppose a company has a 1/3 chance each of being worth $200, $400, and $600 a year from now, but will need to pay 50% of this value in taxes. Also, there is a $100 cost to financial distress. Both interest payments and the cost of financial distress are tax deductible. Does D=0, 150 or 200 maximize the total firm value? Note that in the event of financial distress the financial distress costs have highest priority.

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1 Expected Value and Taxes The company has a 13 chance of being worth 200 400 and 600 each year It w... View the full answer