Question: Question 3 Question 3 18%! A company is considering adding leverage to its capital structure. The company's managers believe they can add as much as

Question 3

Question 3 18%! 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 benets of the tax shield. However, they also recognize that higher debt increases the risk of nancial distress. Based on simulations of the firm's future cash ows, the CFO has made the following estimates in millions of dollars: Debt level 0 10 20 25 30 35 PV Interest tax shield 0.00 1.50 3.00 3.?5 4.50 5.25 W Financial distress costs [alum-mum- The tax rate is 15%. What is the optimal debt choice for the company

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