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the interest tax shield and the probability of distress for different level V of interest tax shield (SMM) S Probability of Financial Distress $0 0% $ $25 0.4 $ 0% AMOUNT OF DEBT (SMM) $70 $60 1.1 $ 1.2 $ 3% 5% $50 0.9 $ 1% in the event of distress, the present value of distress costs is equal to timal level of debt for company: A. $25 million B. $50 million C. $60 million D. $70 million

the interest tax shield and the probability of distress for different level V of interest tax shield (SMM) S Probability of Financial Distress $0 0% $ $25 0.4 $ 0% AMOUNT OF DEBT (SMM) $70 $60 1.1 $ 1.2 $ 3% 5% $50 0.9 $ 1% in the event of distress, the present value of distress costs is equal to timal level of debt for company: A. $25 million B. $50 million C. $60 million D. $70 million

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Company issuing three 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: PV of interest tax shield ($MM) $ Probability of Financial Distress . $0 0% $ $25 0.4 $ 0% AMOUNT OF DEBT (SMM) $60 1.1 $ $70 1.2 $ 3% 5% $50 0.9 $ 1% $80 1.4 $ 8% $90 1.6 $ 20% $100 1.8 33% If in the event of distress, the present value of distress costs is equal to $15 million, then the optimal level of debt for company: A. $25 million B. $50 million C. $60 million D. $70 million
Transcribed Image Text:Company issuing three year debt, and has come up with the following estimates of the value of the interest tax shield and the probability of distress for different levels of debt: PV of interest tax shield ($MM) $ Probability of Financial Distress . $0 0% $ $25 0.4 $ 0% AMOUNT OF DEBT (SMM) $60 1.1 $ $70 1.2 $ 3% 5% $50 0.9 $ 1% $80 1.4 $ 8% $90 1.6 $ 20% $100 1.8 33% If in the event of distress, the present value of distress costs is equal to $15 million, then the optimal level of debt for company: A. $25 million B. $50 million C. $60 million D. $70 million
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