Hawar International is a shipping firm with a current share price of $4.96 and 9

Question

Hawar International is a shipping firm with a current share price of $4.96 and 9.4 million shares outstanding. Suppose that Hawar announces plans to lower its corporate axes by borrowing $19.8 million and repurchasing shares, that Ha arpa sa corporate tax ate o 30 %, an ha s areholders expect he 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 $5.21 after this announcement, what is the PV of financial distress costs Hawar will incur as the result of this new debt? a. If the only imperfection is corporate taxes, what will be the share price after this announcement? The share price after this announcement will be $per share. (Round to the nearest cent.)

Explanation / Answer

a. The Share price post repurchase = 4.96 + 0.3*19.8/9.4 = 5.59

b. PV of Distress Costs = (5.59 - 5.21) * 9.4M = 3.572 Million

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