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Value of the interest tax shield

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Reference no: EM133113676

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:

 

0

40

50

60

70

80

90

PV (interest tax shield, $ million)

0

0.76

0.95

1.14

1.33

1.52

1.71

Probability of Financial Distress

0%

0%

1%

2%

7%

16%

31%

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. ?$2 ?million?

If distress costs are equal to ?$2 ?million, the optimal level of debt is ?$_______________

b.?$5 ?million?

c. ?$25 ?million?

Reference no: EM133113676

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