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Bob Joe, the manager of Farm Works, is analyzing the capital structure of the company...

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Bob Joe, the manager of Farm Works, is analyzing the capital structure of the company in order to determine the optimal debt choice. The amount of debt selected would be a permanent amount, however the higher the amount of leverage the higher the financial distress costs become. The cost of debt is 6% and the corporate tax rate of this company is 35%. What is the optimal debt choice for Farm Works? Debt $15M $30M $45M $60M PV (FDC) $0.2M $0.3M $1.0M $1.0M $60M $15M O $45M $30M Which of the following statements is FALSE? The tax deductibility of interest lowers the effective cost of debt financing for the firm. When a firm uses debt, the interest tax shield provides corporate tax savings each year, lowering the government's stake in the company. Future interest payments vary due to changes the firm makes in the amount of debt outstanding, changes in the interest rate on that debt, and the risk that the firm may default and fail to make an interest payment. The stream of interest payments can be discounted to the present value to determine the interest tax shield, which decreases the value of the firm

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