Internetworks is considering issuing one-year debt. The estimates of the value of the interest tax...
50.1K
Verified Solution
Link Copied!
Question
Accounting
Internetworks is considering issuing one-year debt. The estimates of the value of the interest tax shield and the probability of distress for different levels of debt are as follows.
| Debt level (million dollar) | 0 | 20 | 30 | 40 | 50 | 60 | 70 |
| PV of Tax Shield (million dollar) | 0 | 0.3 | 0.6 | 0.7 | 0.9 | 1 | 1.1 |
| Probability of Financial Distress | 0% | 1% | 2% | 3% | 10% | 15% | 35% |
Suppose in the event of distress, the present value of distress costs is equal to $20 million. The optimal level of debt for Internetworks is:
a.
$30 million
b.
$40 million
c.
$50 million
d.
$20 million
Get Answers to Unlimited Questions
Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!
Membership Benefits:
- Unlimited Question Access with detailed Answers
- Zin AI - 3 Million Words
- 10 Dall-E 3 Images
- 20 Plot Generations
- Conversation with Dialogue Memory
- No Ads, Ever!
- Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Other questions asked by students
StudyZin's Question Purchase
1 Answer
$0.99
(Save $1 )
One time Pay
- No Ads
- Answer to 1 Question
- Get free Zin AI - 50 Thousand Words per Month
Best
Unlimited
$4.99*
(Save $5 )
Billed Monthly
- No Ads
- Answers to Unlimited Questions
- Get free Zin AI - 3 Million Words per Month
*First month only
Free
$0
- Get this answer for free!
- Sign up now to unlock the answer instantly
You can see the logs in the Dashboard.