Question

Hawar International is a shipping firm with a current share price of $5.35 and 10.8 million...

Hawar International is a shipping firm with a current share price of

$5.35

and

10.8

million shares outstanding. Suppose that Hawar announces plans to lower its corporate taxes by borrowing

$19.9

million and repurchasing​ shares, that Hawar pays a corporate tax rate of

30%​,

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

$5.60

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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