Use the information for the question(s) below.

Luther Industries has no debt and expects to generate free cash flows of $48 million each year. Luther believes that if it permanently increases its level of debt to $100 million, the risk of financial distress may cause it to lose some customers and receive less favourable terms from its suppliers. As a result, Luther's expected free cash flows with debt will be only $44 million per year. Suppose Luther's tax rate is 40%, the risk-free rate is 6%, the expected return of the market is 14%, and the beta of Luther's free cash flows is 1.25 (with or without leverage).

9) The value of Luther without leverage is closest to:

A) $315 million

B) $300 million

C) $205 million

D) $340 million

Answer: Explanation:

10) The value of Luther with leverage is closest to:

A) $315 million

B) $340 million

C) $205 million

D) $300 million

Answer: Explanation:

Use the information for the question(s) below.

Big Blue Banana (BBB) is a clothing retailer with a current share price of $10.00 and with 25 million shares outstanding. Suppose that Big Blue Banana announces plans to lower its corporate taxes by borrowing $100 million and using the proceeds to repurchase shares.

11) Suppose that BBB pays corporate taxes of 40% and that shareholders expect the change in debt to be permanent. Assume that capital markets are perfect except for the existence of corporate taxes and financial distress costs. If the price of BBB's stock rises to $10.80 per share following the announcement, then the present value of BBB's financial distress costs is:

Answer: