Question
Kohwe Corporation plans to finance a new investment with leverage. Kohwe Corporation plans to borrow $46.3 million to finance the new investment. The firm will
Kohwe Corporation plans to finance a new investment with leverage. Kohwe Corporation plans to borrow $46.3 million to finance the new investment. The firm will pay interest only on this loan each year, and it will maintain an outstanding balance of $46.3 million on the loan. After making the investment, Kohwe expects to earn free cash flows of $10.9 million each year. However, due to reduced sales and other financial distress costs, Kohwe's expected free cash flows will decline to $9.9 million per year. Kohwe currently has $4.9 million shares outstanding, and it has no other assets or opportunities. Assume that the appropriate discount rate for Kohwe's future free cash flows is 7.9% and Kohwe's corporate tax rate is 40% . What is Kohwe's share price today given the financial distress costs of leverage?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started