Kohwe Corporation plans to finance a new investment with leverage. Kohwe Corporation plans to borrow $47.8 million to finance the new investment. The firm will pay interest only on this loan each year, and it will maintain an outstanding balance of $47.8 million on the loan. After making the investment, Kohwe expects to earn free cash flows of $10.9 million each year. However, due to reduced sales and other financial distress costs, Kohwe's expected free cash flows will decline to $9.9 million per year. Kohwe currently has 4.7 million shares outstanding, and it has no other assets or opportunities. Assume that the appropriate discount rate for Kohwe's future free cash flows is 7.6% and Kohwe's corporate tax rate is 25%. What is Kohwe's share price today given the financial distress costs of leverage?
Kohwe Corporation plans to finance a new investment with leverage. Kohwe Corporation plans to borrow $47.8 million to finance the new investment. The firm will pay interest only on this loan each year, and it will maintain an outstanding balance of $47.8 million on the loan. After making the investment, Kohwe expects to earn free cash flows of $10.9 million each year. However, due to reduced sales and other financial distress costs, Kohwe's expected free cash flows will decline to $9.9 million per year. Kohwe currently has 4.7 million shares outstanding, and it has no other assets or opportunities. Assume that the appropriate discount rate for Kohwe's future free cash flows is 7.6% and Kohwe's corporate tax rate is 25%. What is Kohwe's share price today given the financial distress costs of leverage?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Kohwe Corporation plans to finance a new investment with leverage. Kohwe Corporation
plans to borrow $47.8 million to finance the new investment. The firm will pay interest only on
this loan each year, and it will maintain an outstanding balance of $47.8 million on the loan.
After making the investment, Kohwe expects to earn free cash flows of $10.9 million each
year. However, due to reduced sales and other financial distress costs, Kohwe's expected free
cash flows will decline to $9.9 million per year. Kohwe currently has 4.7 million
shares outstanding, and it has no other assets or opportunities. Assume that the appropriate
discount rate for Kohwe's future free cash flows is 7.6% and Kohwe's corporate tax rate is
25%. What is Kohwe's share price today given the financial distress costs of leverage?
The price per share is $
per share. (Round to the nearest cent.)
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