An unleveraged company has a total market value of Rs 15,00,000. It decides to go for financial leverage to have a positive present value of tax benefit equal to 20% of the market value of debt. But...

An unleveraged company has a total market value of Rs 15,00,000. It decides to go for financial leverage to have a positive present value of tax benefit equal to 20% of the market value of debt. But it fears that if it borrows beyond Rs 5 lakh, there would be bankruptcy cost, agency cost and also the risk borne by the creditors would rise progressively. To be specific, the present value of these costs would be 5% on a borrowing of Rs 10 lakh, 10% on a borrowing of Rs 12 lakh and 20% on a borrowing of Rs 15 lakh. Can you think of an optimal capital structure in such cases?