Hawar International is a shipping firm with a current share price of $5.03 and 9.4 million shares outstanding. Suppose that Hawar announces plans to lower its corporate taxes by borrowing $20.5 million and repurchasingshares, that Hawar pays a corporate tax rate of 30%, and that shareholders expect the change in debt to be permanent.

a. If the only imperfection is corporatetaxes, what will be the share price after thisannouncement?

b. Suppose the only imperfections are corporate taxes and financial distress costs. If the share price rises to $5.28 after thisannouncement, what is the PV of financial distress costs Hawar will incur as the result of this newdebt?