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Hawar International is a shipping firm with a current share price of $5.50 and 5 million shares outstanding. Suppose Hawar announces plans to lower its corporate taxes by borrowing $25 million and repurchasing shares.

a. With perfect capital markets, what will the share price be after this announcement?

b. Suppose that Hawar pays a corporate tax rate of 40%, and that shareholders expect the change in debt to be permanent. If the only imperfection is corporate taxes, what will the share price be after this announcement?

c. Suppose the only imperfections are corporate taxes and financial distress costs. If the share price rises to $7.15 after this announcement, what is the PV of financial distress costs Hawar will incur as the result of this new debt?

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Part 1

a. With perfect capital markets, what will the share price be after this announcement?

With perfect capital markets, the share price will be

$enter your response here

per share. (Round to the nearest cent.)

Part 2

b. Suppose that Hawar pays a corporate tax rate of 40%, and that shareholders expect the change in debt to be permanent. If the only imperfection is corporate taxes, what will the share price be after this announcement? If the only imperfection is corporate taxes, the share price will be

$enter your response here

per share. (Round to the nearest cent.)

Part 3

c. Suppose the only imperfections are corporate taxes and financial distress costs. If the share price rises to $7.15

after this announcement, what is the PV of financial distress costs Hawar will incur as the result of this new debt? If the share price rises to

$7.15 after this announcement, the PV of financial distress costs Hawar will incur as the result of this new debt will be

$enter your response here

million. (Round to two decimal places.)

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