Question: Popstar, a record producer, is considering a restructuring to issue debt for its upcoming expansion project. Currently, Popstar has an annual EBIT of $975,000 for

Popstar, a record producer, is considering a restructuring to issue debt for its upcoming expansion project. Currently, Popstar has an annual EBIT of $975,000 for the foreseeable future. The following table shows different combinations (scenarios) of debt issued, and corresponding distress costs. The T-Bill yield is 3%, corporate tax rate is 40%, and the market risk premium is 7%. (19 marks)

Popstar, a record producer, is considering a
PV of distress Debt Cost of Debt costs 0 O $2,750,000 6% $500,000 $4,500,000 7.5% $2000,000

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