15-21. Marpor Industries has no debt and expects to generate free cash flows of

Question

15-21. Marpor Industries has no debt and expects to generate free cash flows of $14 million each year. Marpor believes that if it permanently increases its level of debt to $45 million, the risk of financial distress may cause it to lose some customers and receive less favorable terms from its suppliers. As a result, Marpor's expected free cash flows with debt will be only $13 million per year. Suppose Marpor's tax rate is 40%, the risk-free rate is 3%, the expected return of the market is 16%, and the
beta of Marpor's free cash flows is 1.2 (with or without leverage).

a. Estimate Marpor's value without leverage. Marpor's value is ____ million (round to the nearest million)

b. Estimate Marpor's value with the new leverage. Marpor's value is ______ million(round two decimal places)

Explanation / Answer

r = 3% + 1.2 x (16% - 3%) = 18.6% V = 14 / 0.186 = $75million b) (didnt change the number for 0.186) r = 3% + 1.2 x (16% - 3%) = 18.6% V = (13/0.186) + 0.40 x 45 = $87.89 million

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.