Your firm is considering issuing​ one-year debt, and has come up with the following estimates of the value of the interest tax shield and the probability of distress for different levels of​ debt: Suppose the firm has a beta of​ zero, so that the appropriate discount rate for financial distress costs is the​ risk-free rate of 5%. Which level of debt above is
Your firm is considering issuing​ one-year debt, and has come up with the following estimates of the value of the interest tax shield and the probability of distress for different levels of​ debt:
Suppose the firm has a beta of​ zero, so that the appropriate discount rate for financial distress costs is the​ risk-free rate of 5%.
Which level of debt above is optimal​ if, in the event of​ distress, the firm will have distress costs equal to
a. ​$3 ​million?
b. ​$7 ​million?
c. ​$24 ​million?