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Kohwe Corporation plans to issue equity toraise $50 million to finance a new investment. After making the investment, Kohwe expects to earn free cash flows of $10million each year. Kohwe currently has 5 million shares outstanding, and it has no other assets oropportunities. 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 distresscosts.
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 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 reducedsales and other financial distress costs. Assume that the appropriate discount rate for Kohwe's future free cash flowsis still 8%.d.) What is Kohwe's share price today given the financial distress costs of leverage?
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