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The Value of a Levered Firm: Financial Distress Costs

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If the value of a levered firm is $13,000,000, and the value of corresponding unlevered firm is $12,000,000, determine the present value of financial distress costs, if the firm has $5,000,000 of debt outstanding and is in the 40 percent tax bracket.

A. $500,000
B. $1,000,000
C. $3,000,000
D. $5,000,000
E. Cannot be determined because we are unable to calculate the present value of the tax savings.

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The solution explains how to calculate the value of a levered firm.

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Value of levered firm = Value of unlevered firm + Tax Shield from Debt - Financial ...

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