a). Compare and contrast the quantitative methods that can be used to determine optimal debt capital structure. b). Nott

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a). Compare and contrast the quantitative methods that can be
used to determine optimal debt capital structure.
b). Nottingham North, a railroad company, had debt outstanding
of £985 million and 40 million shares trading at £46.25 per share
today. It earned £203 million in earnings before interest and taxes
and faced a marginal tax rate of 36.56%. The firm was interested in
estimating its optimal leverage using the adjusted present value
approach. The following table summarizes the estimated bond rating
with probabilities of default at each level of debt from 0% to 90%.
The direct and indirect cost of bankruptcy together is estimated to
be 25% of the firm value. Estimate the optimal ratio of the firm
based on levered firm value.
c). Discuss the advantage and disadvantage of an immediate shift
to optimal debt ratio for a firm.
d). Explain the guiding principle of debt design.