5/8/2021 Review

Worked Solution (Formula Solution)

a. What is the NPV of Kohwe's investment?

To calculate the NPV, use the following formula:

FCF
NPV = − Equity investment
Discount rate

Therefore,

$10 million
NPV = − $60 million = $65.0 million
0.08

The NPV is $65.0 million.

b. What is Kohwe's share price today?

To calculate the price today, use the following formula:

Total value of the firm

Price per share =
Number of shares outstanding

The total value of the firm is equal to the present value of its future free cash flows (including up front
investment costs), which is simply the NPV. Therefore,

$65.0 million
Price per share = = $13.00 per share
5 million

c. What is Kohwe's share price today if the investment is financed with debt?

To calculate the share price today if the investment is financed with debt, use the following formula:

Total value of the firm + Corporate tax rate × Debt investment

Price per share =
Number of shares outstanding

If the firm plans to add leverage, its value today will include the present value of future interest tax shields.
Therefore,

$65.0 million + 0.21 × $60 million

Price per share = = $15.52 per share
5 million

Kohwe's share price today, if the investment is financed with debt, is $15.52 per share.

d. What is Kohwe's share price today given the financial distress costs of leverage?

To calculate the share price today given the financial distress costs of leverage, use the following formula:

FCF
− Debt investment + Corporate tax rate × Debt investment
Discount rate
Price per share =
Number of shares outstanding

Therefore,

$9 million
− $60 million + 0.21 × $60 million
0.08
Price per share = = $13.02 per share
5 million

Kohwe's share price today given the financial distress costs of leverage is $13.02 per share.

https://www.mathxl.com/Student/PlayerHomework.aspx?homeworkId=596432389&questionId=1&flushed=false&cId=6485913&review=yes&cent… 1/2
5/8/2021 Review

The price per share today is $13.00. However, this price will change based on the effects of financing an
investment with debt or the financial distress costs of leverage.

https://www.mathxl.com/Student/PlayerHomework.aspx?homeworkId=596432389&questionId=1&flushed=false&cId=6485913&review=yes&cent… 2/2