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Consider two companies, Firm U and Firm L, that are identical except for their respective capital structure. The Firm U has 100% equity and worth $10 million. Assume there exists 20% corporate income tax. Also suppose that the cost of bankruptcy is given by ???? = $1,000,000 × [exp ($10,000,000) 1]. Now, the firm wants to change its capital structure that optimize its value. Determine the firm’s optimal capital structure. To be more specific, what is the debt and equity for the firm with optimal structure after change.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92876649

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