Suppose the appropriate discount rate for Kohwe ’ s future free cash flows is 8 %, and the only capital market imperfections are corporate taxes and financial distress costs .
a ) What is the NPV of Kohwe ’ s investment ? b ) What is Kohwe ’ s share price today ?
Suppose Kohwe borrows the $ 50 million instead . The firm will pay interest only on this loan each year , and it will maintain an outstanding balance of $ 50 million on the loan . Suppose that Kohwe ’ s corporate tax rate is 40 %, and expected free cash flows are still $ 10 million each year .
c ) What is Kohwe ’ s share price today if the investment is financed with debt ?
Now suppose that with leverage , Kohwe ’ s expected free cash flows will decline to $ 9 million per year due to reduced sales and other financial distress costs . Assume that the appropriate discount rate for Kohwe ’ s future free cash flows is still 8 %.
e ) What is Kohwe ’ s share price today given the financial distress costs of leverage ?