Astra Corporation plans to invest $ 50million to finance a new investment. After making the...
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Finance
Astra Corporation plans to invest $ 50million to finance a new investment. After making the investment, Astra expects to earn free cash flows of $10million each year indefinitely. Suppose Astra borrows the $ 40 million. The firm will pay interest only on this loan each year indefinitely. Astra currently has 5 million shares outstanding and has no other assets opportunities. Suppose the appropriate discount rate for Astra's future free cash flows is 8%, and the only capital market imperfections are corporate taxes a rate 30%.
Required:
a) What is the NPV Astra's investment? [ 1mark ]
b) What is Astra's share price? [ 2marks ]
c) List the propositions I and ll of Modigliani and Miller (1963) and discuss their implications. 3 marks
d) Astra's debtholders are concerned that the firm's managers may not act in their best interests in future investment decisions, especially so if the firm goes into financial distress. Explain the over - investment problem and the under-investment problem. [ 2marks ]
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