Hawar International is a shipping firm with a current share price of $4.81 and 9.3 million...

Hawar International is a shipping firm with a current share price of $4.81 and 9.3 million shares outstanding. Suppose that Hawar announces plans to lower its corporate taxes by borrowing $8.1 million and repurchasing shares, that Hawar pays a corporate tax rate of 25%, and that shareholders expect the change in debt to be permanent.

a. If the only imperfection is corporate taxes, what will be the share price after this announcement?

b. Suppose the only imperfections are corporate taxes and financial distress costs. If the share price rises to $4.86 after this announcement, what is the PV of financial distress costs Hawar will incur as the result of this new debt?

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Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

ROUNDING CONDITIONS ARE NOT MENTIONED

SO ANSWER TO SECOND PART WILL DIIFER, ON THE BASIS OF ROUNDING

IF WE DO NOT ROUND, THE ANSWER WILL BE 1.56 AND IF WE ROUND, ANSWER WILL BE 1.58, SO PLEASE CHECK ACCORDINGLY. THANK YOU

jeff jeffy answered 1 year ago

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