Question: Part B. Simpson Ltd is a small IT company, which has 2 million shares outstanding and a share price of $20 per share. The management

Part B. Simpson Ltd is a small IT company, which has

Part B. Simpson Ltd is a small IT company, which has 2 million shares outstanding and a share price of $20 per share. The management of Simpson plans to increase debt and suggests it will generate $3 million tax shield benefits in total present value. If the share price of Simpson increased to $21 on the announcement of this plan, calculate the total value of financial distress cost expected by the market. Assume the market is efficient and the trade-off theory holds. (7 marks)

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