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Kohwe Corporation plans to issue equity to raise $60 million to finance a new investment. After...


Kohwe Corporation plans to issue equity to raise $60 million to finance a new investment. After making the​ investment, Kohwe expects to earn free cash flows of $11 million each year. Kohwe currently has 5 million shares​ outstanding, and it has no other assets or opportunities. 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 $60 million instead. The firm will pay interest only on this loan each​ year, and it will maintain an outstanding balance of

$60 million on the loan. Suppose that​ Kohwe's corporate tax rate is 30%​, and expected free cash flows are still $11 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 $10 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%.

d. What is​ Kohwe's share price today given the financial distress costs of​ leverage?

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