Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Textbook Question
Chapter 16, Problem 9P
Kohwe Corporation plans to issue equity to raise $50 million to finance a new investment. After making the investment, Kohwe expects to earn
- a. What is the
NPV of Kohwe’s investment? - b. Given these plans, what is Kohwe’s value per share today? Suppose Kohwe borrows the $50 million instead. The firm will pay interest only on this loan each year, and it will maintain an outstanding balance of $50 million on the loan. Suppose that Kohwe's corporate tax rate is 40%, and expected free cash flows are still $10 million each year.
- c. What is Kohwe’s share price today if the investment is financed with debt? Now suppose that with leverage, Kohwe’s expected free cash flows will decline to $9 million per year due to reduced sales and other financial distress costs. Assume that the appropriate discount rate for Kohwe’s future free cash flows is still 8%.
- d. What is Kohwe’s share price today given the financial distress costs of leverage?
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Kohwe Corporation plans to issue equity to raise $50 million to finance a new investment.
After making the investment, Kohwe expects to earn free cash flows of $10 million each year.
Kohwe currently has 5 million shares outstanding, and has no other assets or opportunities. Suppose the appropriate discount rate for Kohwe's future free cash flows is 8%, and the only capital market imperfections are corporate taxes and financial distress costs.
a. What is the NPV of Kohwe's investment?
b. What is Kohwe's share price today?
Suppose Kohwe borrows the $50 million instead. The finn will pay interest only on this loan each year, and maintain an outstanding balance of $40 million on the loan. Suppose that Kohwe's corporate tax rate is 35%, and expected free cash flows are still $9 million each year.
c. What is Kohwe's share price today if the investment is financed with debt?
Now suppose that with leverage, Kohwe's expected free cash flows wiH decline to $8 million per year due…
KMS corporation has assets of $650 million, $130 million of which are cash. It has debt of $162.5 million. Suppose that KMS decides to initiate a dividend, but it wants the present value of payout to
be $65 million. If its cost of equity capital is 10.7%, to what amount per year in perpetuity should it commit (assuming perfect capital market)?
KMS should commit to $ million per year. (Round to two decimal places.)
Nielson Motors (NM) has no debt. Its assets will be worth $600 million in one year if the
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Chapter 16 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 16.1 - Prob. 1CCCh. 16.1 - Does the risk of default reduce the value of the...Ch. 16.2 - If a firm files for bankruptcy under Chapter 11 of...Ch. 16.2 - Why are the losses of debt holders whose claims...Ch. 16.3 - Prob. 1CCCh. 16.3 - True or False: If bankruptcy costs are only...Ch. 16.4 - Prob. 1CCCh. 16.4 - According to the trade-off theory, all else being...Ch. 16.5 - Prob. 1CCCh. 16.5 - Why would debt holders desire covenants that...
Ch. 16.6 - Prob. 1CCCh. 16.6 - Prob. 2CCCh. 16.7 - Coca-Cola Enterprises is almost 50% debt financed...Ch. 16.7 - Why would a firm with excessive leverage not...Ch. 16.7 - Describe how management entrenchment can affect...Ch. 16.8 - How does asymmetric information explain the...Ch. 16.8 - Prob. 2CCCh. 16.9 - Prob. 1CCCh. 16.9 - Prob. 2CCCh. 16 - Gladstone Corporation is about to launch a new...Ch. 16 - Baruk Industries has no cash and a debt obligation...Ch. 16 - When a firm defaults on its debt, debt holders...Ch. 16 - Prob. 4PCh. 16 - Prob. 5PCh. 16 - Suppose Tefco Corp. has a value of 100 million if...Ch. 16 - You have received two job offers. Firm A offers to...Ch. 16 - As in Problem 1, Gladstone Corporation is about to...Ch. 16 - Kohwe Corporation plans to issue equity to raise...Ch. 16 - Prob. 10PCh. 16 - Prob. 11PCh. 16 - Hawar International is a shipping firm with a...Ch. 16 - Your firm is considering issuing one-year debt,...Ch. 16 - Marpor Industries has no debt and expects to...Ch. 16 - Real estate purchases are often financed with at...Ch. 16 - On May 14, 2008, General Motors paid a dividend of...Ch. 16 - Prob. 17PCh. 16 - Consider a firm whose only asset is a plot of...Ch. 16 - Prob. 19PCh. 16 - Prob. 20PCh. 16 - Prob. 21PCh. 16 - Consider the setting of Problem 21 , and suppose...Ch. 16 - Consider the setting of Problems 21 and 22, and...Ch. 16 - You own your own firm, and you want to raise 30...Ch. 16 - Empire Industries forecasts net income this coming...Ch. 16 - Ralston Enterprises has assets that will have a...Ch. 16 - Prob. 27PCh. 16 - If it is managed efficiently, Remel Inc. will have...Ch. 16 - Which of the following industries have low optimal...Ch. 16 - According to the managerial entrenchment theory,...Ch. 16 - Info Systems Technology (IST) manufactures...Ch. 16 - Prob. 32PCh. 16 - Prob. 33P
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Discounted cash flow model; Author: Edspira;https://www.youtube.com/watch?v=7PpWneOBJls;License: Standard YouTube License, CC-BY