Mechano Construction Inc generates perpetual annual EBIT of $500. The

Mechano Construction Inc generates perpetual annual EBIT of $500. The corporate tax rate is 35%. Mechano has 300 shares outstanding that trade for $6.89. Mechano has debt worth $1,512 and its debt-to-equity ratio is 0.667.

The CFO of Mechano is thinking about borrowing another $100 to repurchase shares. However, the additional debt will increase the present value of financial distress costs by $40. The CFO wants to maximize the value of the firm. What is the benefit of the additional debt minus the cost of the additional debt?
A) -$5
B) $0
C) $5
D) $35
E) $40

ANSWER

A