earningsbeforeinterestandtaxes.Theadjustmenttothetax
ratewasdescribed morefullyearlierinthecost of capital
approach.Theexpectedtaxsavingsateachlevelofdebtare
summarized in the following table:
The final step in the process is to estimate the expected
bankruptcycostbasedonthebondratings,theprobabilitiesof
default,andtheassumptionthatthebankruptcycostis30%of
firm value. The following table summarizes these
probabilities and the expected bankruptcy cost, computed
based on the unlevered firm value.
Thevalueoftheleveredfirmisestimatedinthefollowing
table byaggregatingtheeffectsof thetaxsavingsand the
expected bankruptcy cost.