Your firm currently has no debt and a marginal tax rate of 40%. You are contemplating...

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Your firm currently has no debt and a marginal tax rate of 40%. You are contemplating issuing a one-year bond to pay your shareholders a one-time dividend, but you are unure how much debt to issue. After one year you will repay the debt However, depending on how much debt you issue you will face a different interest rate and a different probability of financial distress (see table below). If you experience financial distress you expect the present value of distress costs to be $10 million. Assume that there are no agency benefits and no agency costs associated with this transaction. How much debt should you issue? Estimates under Different Debt Levels Debt Principal in $ millions 10 40 60 80 90 0 3.50% 4% 4.50% 5% rD 0.0% Probability of Financial Distress 0.0% 1.0% 5.0% 9.0% Your firm currently has no debt and a marginal tax rate of 40%. You are contemplating issuing a one-year bond to pay your shareholders a one-time dividend, but you are unure how much debt to issue. After one year you will repay the debt However, depending on how much debt you issue you will face a different interest rate and a different probability of financial distress (see table below). If you experience financial distress you expect the present value of distress costs to be $10 million. Assume that there are no agency benefits and no agency costs associated with this transaction. How much debt should you issue? Estimates under Different Debt Levels Debt Principal in $ millions 10 40 60 80 90 0 3.50% 4% 4.50% 5% rD 0.0% Probability of Financial Distress 0.0% 1.0% 5.0% 9.0%

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The firm should issue Debt of 80 Million Explanation All ... View the full answer