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Marpor Industries has no debt and expects to generate free cash flows of $14 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 favourable terms from its suppliers. As a result, Marpor's expected free cash flows with debt will be only $13 million per year. Suppose Marpor's tax rate is 30%, the risk-free rate is 4%, the expected return of the market is 16%, and the beta of Marpor's free cash flows is 1.3 (with or without leverage).
a. Estimate Marpor's value without leverage.
b. Estimate Marpor's value with the new leverage.
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What is Charter's total interest expense per year associated with this bond issue?
Billy Bob Inc is preparing to calculate its cost of debt. It presently has debt outstanding that pays $ 81 per year in interest and has seven years left unto maturity. The current market value of those bonds is $ 1,090. The company pays 35% in taxes...
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