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Question - Marpor Industries has no debt and expects to generate free cash flows of $15 million each year. Marpor believes that if it permanently increases its level of debt to $35 million, the risk of financial distress may cause it to lose some customers and receive less favorable terms from its suppliers. As a result, Marpor's expected free cash flows with debt will be only $14 million per year. Suppose Marpor's tax rate is 21%, the risk-free rate is 5%, the expected return of the market is 13%, and the beta of? Marpor's free cash flows is 1.2 (with or without leverage).
Required -
a. Estimate Marpor's value without leverage.
b. Estimate Marpor's value with the new leverage.
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