Marpor Industries has no debt and expects to generate free cash flows of $16.19 million each year. Marpor believes that if it permanently increases its level of debt to $32.59 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 $13.32 million per year. Suppose Marpor's tax rate is 28%, the risk-free rate is 3%, the expected return of the market is 12%, and the beta of Marpor's free cash flows is 1.20 (with or without leverage). a. Estimate Marpor's value without leverage. b. Estimate Marpor's value with the new leverage.
Marpor Industries has no debt and expects to generate free cash flows of $16.19 million each year. Marpor believes that if it permanently increases its level of debt to $32.59 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 $13.32 million per year. Suppose Marpor's tax rate is 28%, the risk-free rate is 3%, the expected return of the market is 12%, and the beta of Marpor's free cash flows is 1.20 (with or without leverage). a. Estimate Marpor's value without leverage. b. Estimate Marpor's value with the new leverage.
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter17: Dynamic Capital Structures And Corporate Valuation
Section: Chapter Questions
Problem 3P
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