 Modigliani and Miller assume that the cash flows associated with a firm's assets are not subject to the firm's choice of capital structure. However, the occurrence of financial distress caused by a levered firm may reduce the cash flows of the firm available for its investors. Now, let's see whether there is any impact of the financial distress cost on the firm's value. We have an example where we are using the same earlier example with certain modifications where we see that without leverage the company's worth will be in case the product goes successful 150 million. And if the product goes failure, the 80 million dollars with leverage the company's worth would be in case of product failure less than 80 million dollars. And the outstanding debt will be there to the tune of 100 million dollars. And if the product is failure and the value of the firm is less than 80 million dollars, then there will be the chance of bankruptcy. This will cause the firm to incur a financial distress cost to the tune of 20 million dollars. So the recovery from the firm's assets will be assumed at 60 million dollars. This means that financial distress cost will lower the levered firm's total value. And in this particular case, the MM1 proposition is not going to hold true. Now, we have an example to see the impact of bankruptcy cost on the firm's value under the MM1 proposition. We are assuming that with and without leverage the same payments will be there to the owners. We assume 5% as the risk-free rate and we assume that new product has equal chances of success and failure. The firm's cash flows are assumed to be unrelated to the state of the economy. This means that risk is diversifiable. So no risk premium is needed. We assume the project's betra at zero. So this means that the firm's cost of capital is equal to the risk-free rate. We have the values of equity as we have determined them earlier. The unlevered value of equity is 109.52 million dollars and this is basically the value of unlevered firm. The value of levered firm is, levered equity is 23.81 million. Now, as you determine the value of debt after the bankruptcy cost, it comes to 76.19 million. Now, if we calculate the value of levered firm, we need to add up the value of levered equity to the value of the debt and that is the total of 100 million dollars. So we see that there is a decline of 9.52 million dollars in the levered firm's value and that 9.52 million dollars is basically equal to the present value of the cost of the financial distress which is 20 million dollars and as we are seeing that the computation exists here where the present value of the financial distress cost is equal to 9.52 million dollars. So we see that the financial distress cost in the case of bankruptcy have an impact on the value of the firm's assets. Now question arises that who pays the financial distress cost? In bankruptcy, the firm's equity holders care very little about this cost. In fact, the debt holders foresee the recovery of lesser amount in the case of default. So they pay less amount to the firm as debt initially. These amounts basically equal the present value of the bankruptcy cost and this makes lesser amount to be paid as dividend to the owners of the firm. So we can conclude that in fact, this difference is the money that goes out of the pocket of the equity holders. So in fact, debt holders foresee that there may be the occurrence of some financial distress cost as a result. They pay lesser amount to the firm while issuing debt to the firm. As a result, the same amount is reduced while paying dividend to the shareholders. So ultimately, there are the equity holders who bear the cost of the financial distress. Let's see how this happens. We have an example. That example is the same we are using in our case. We have outstanding shares of 10 million. We have a planned debt issue of 100 million. The purpose is to go for share repurchase using this debt of 100 million proceeds. Risk rate is 5% and the value of unlivered firm is 109.52 million. So the initial share price using this market value is 10.952 dollars each. The value of livered firm is 100 million. So the new share price is equal to 10 dollars each. With leverage scenario, if the company is facing failure, then the debt's new value will be 76.19 million. This means that the share rate purchase will be using this debt proceed of 76.19 million. And the firm will be repurchasing its 7.619 million shares. So the outstanding shares will be 2.38 million. Now using the outstanding shares of 3.281 million, the value of livered equity will be equal to 23.81 million. And resultingly the new share price will be equal to 10 dollars each. That is the division of 23.81 million shares over the cost of 2.38 million shares which is equal to 23.81 million. Now the recapitalization cost to the shareholders is as 0.952 dollars per share and in total it comes to 9.52 million dollars. The conclusion we can derive using this example is that the debt holders bear the cost in the end and shareholders pay the present value of the cost of the financial distress upfront.