Marpor Industries has no debt and expects to generate free cash flows of $15 million each year. Marpor believes that if it permanently increases its level of debt to $45 million, the risk of financial distress may cause it to lose some customers and receive less favorable terms from its suppliers. As a result, Marpor’s expected free cash flows with debt will be only $14 million per year. Suppose Marpor’s tax rate is 30%, the risk-free rate is 6%, the expected return of the market is 12%, and the beta of Marpor’s free cash flows is 1.10 (with or without leverage).

a. Estimate Marpor’s value without leverage.

b. Estimate Marpor’s value with the new leverage.

AppendixLO1