Hawar International is a shipping firm with a current share price of $5.50 and 1

Question

Hawar International is a shipping firm with a current share price of $5.50 and 10 million shares outstanding. Suppose Hawar announces plans to lower its corporate taxes by borrowing $20 million and repurchasing shares. a) With perfect capital markets, what will the share price be after this announcement? Suppose that Hawar pays a corporate tax rate of 30%, and that shareholders expect the change in debt to be permanent. b) If the only imperfection is corporate tax rate of 30%, what will the share price be after this announcement? c) Suppose the only 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 Hawar will incur as the result of this new debt?

Explanation / Answer

a. share prices increases, because they are going for borrowing at lesser cost and it will be help to increase the firms value.

b. share price will be same with this announcement

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