Part A (15 Marks) Hawar International is a shipping firm with a current share price of $5.50 and 10 million shares outstanding. Suppose that Hawar announces plans to lower its corporate taxes by borrowing $20 million and repurchasing shares. Hawar pays a corporate tax rate of 30%, and shareholders expect the change in debt to be permanent. a) If the only market imperfection to be considered is corporate taxes, what will the share price be after this announcement? (3 Marks) b) Suppose the only market 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? (3 Marks) c) If Hawar wants to continue to raise debt for tax shield benefits, under what condition will the firm achieve an optimal capital structure (i.e. Debt to Equity)? (3 Marks) d) Bankruptcy costs can be of two types. Describe these types of costs. (3 Marks) e) Provide 2 examples of bankruptcy costs (i.e. 1 of each type). (3 Marks) Part B (15 Marks) SteelCo is planning to repurchase part of its stock by issuing corporate debt. As a result, the firm's debt-to-equity ratio is expected to rise from 35% to 45%. The firm currently has $10 million worth of debt outstanding. The annual cost of this debt is 7.5%. Steel Co expects to earn $5.5 million annually in perpetuity and pays no taxes. a) What is the market value of SteelCo before and after the repurchase announcement? (5 Marks) b) What is the expected return on SteelCo's equity before the announcement of the stock repurchase? (4 Marks) c) What is the expected return on equity of an otherwise identical all-equity firm? (3 Marks) d) What is the expected return on SteelCo's equity after the announcement of the stock repurchase? (3 Marks)