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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
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 $25.16 million, the risk of financial distress may cause it to lose some customers and receive less favourable 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 25%, the risk-free rate is 6%, the expected return of the market is 15%, and the beta of Marpor's free cash flows is 1.1 (with or without leverage). a. Estimate Marpor's value without leverage. b. Estimate Marpor's value with the new leverage
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