Hawar International is a shipping firm with a current share price of $5.50 and 10 million shares

Question:

Hawar International is a shipping firm with a current share price of $5.50 and 10 million shares outstanding. Suppose Hawar announces plans to lower its corporate taxes by borrowing $20 million and repurchasing shares.

a. With perfect capital markets, what will the share price be after this announcement?

Suppose that Hawar pays a corporate tax rate of 30%, and that shareholders expect the change in debt to be permanent.

b. If the only imperfection is corporate taxes, what will the share price be after this announcement?

c. Suppose the only imperfections are corporate taxes and financial distress costs. If the share price rises to $5.75 after this announcement, what is the PV of financial distress costs Hawar will incur as the result of this new debt?

Appendix

Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Corporate Finance

ISBN: 9780137845071

6th Edition

Authors: Jonathan Berk, Peter DeMarzo

Question Posted: