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1. Corwin International is a shipping firm with a current share price of $5.50 and 10 million shares outstanding. Suppose Corwin announces plans to increase its leverage by borrowing $20 million and repurchasing shares.
a. With perfect capital markets, what will the share price be after this announcement? Suppose that Corwin pays a corporate tax rate of 30%, and that the shareholders expect the increase in debt to be permanent.
b. If the only market imperfection is corporate taxes, what will the share price be after this announcement?
c. Suppose the only market imperfections are corporate taxes and financial distress costs. If the share price rises to $5.75 after this announcement, what is the PV of financial distress costs Corwin will incur as the result of this new debt?
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