- Corwin International is a shipping firm with a current share
price of $5.50 and 10 million shares outstanding. Suppose Corwin
announces plans to increase its leverage by borrowing $20 million
and repurchasing shares.
- With perfect capital markets, what will the share price be
after this announcement?
Suppose that Corwin pays a corporate
tax rate of 30%, and that the shareholders expect the increase in
debt to be permanent.
- If the only market imperfection is corporate taxes, what will
the share price be after this announcement?
- Suppose the only market imperfections are corporate taxes and
financial distress costs. If the share price rises to $5.75 after
this announcement, what is the PV of financial distress costs
Corwin will incur as the result of this new debt?