HERE IS A SAMPLE SOLUTION WITH DIFFERENT VALUES, BE VERY CAREFUL MAKE SURE YOU USE THE VALUES FOR THIS QUESTION IN THE ABOVE WORKING, WILL UPVOTE FOR CORRECT ANSWERS.

\\[ \\begin{array}{l} =30.76 \\text { million } \\\\ \\end{array} \\] A correct answer is 31.85 , which can be typed in as follows: 31.85 A correct answer is 14.87 , which can be typed in as follows: 14.87 Cain \\& Abel Inc. is a publicly listed chain of for-profit mental health services, with their consultants and psychologists specialising in family therapy. The firm is currently all-equity financed (i.e. unlevered) and has a current share price of \\( \\$ 24.30 \\) for each one of its 12.4 million shares outstanding. The firm pays corporate tax at a rate of \27.5. Cain \\& Abe/ intends to lower its corporate taxes by conducting a leveraged recapitalization. That is, by issuing \\( \\$ 97.0 \\) million worth of par-value bonds and using the funds raised to immediately repurchase shares. Shareholders in Cain \\& Abe/ will expect that the change in debt will be permanent (i.e. interest-only), with the firming being expected to make constant annual interest payments at a rate of \4.1 per annum in perpetuity. Assume that the only capital market imperfection is the presence of corporate taxes (i.e. there are no costs of financial distress, agency costs, etc.). A) What is your best estimate of the value of each share of Cain \\& Abe/ Inc. after the firm announces the proposed leveraged recapitalization? That is, what price should investors now be willing to pay for shares of the company? The share price should change to \\( \\$ \\) per share when the firm announces the recapitalization. (Round your answer to 2 decimal places. Use the unrounded value in any subsequent calculations that require it) Now in addition to the presence of corporate taxation, suppose that financial distress (i.e. bankruptcy costs) are another possible capital market imperfection. B) Assume that the share price actually rose to \\( \\$ 25.89 \\) per share after the firm announced the leveraged recapitalization. In today's dollars, how much does the market believe that the financial distress costs caused by this additional debt is worth? That is, what present value of financial distress costs do investors believe Cain \\& \\( A b e / \\) will incur as a result of becoming levered with the proposed level of debt financing? The PV of the financial distress costs caused by issuing the debt must be \\( \\$ \\) million. (Round your answer to 2 decimal places) Full solution We know that \\[ \\begin{aligned} \\mathrm{VL} & =\\mathrm{VU}+\\mathrm{PV}(\\text { Interest Tax Shields }) \\\\ & =\\mathrm{VU}+\\text { Debt * TaxRate } \\end{aligned} \\] Part A: Share price \\( =V L / \\) No. of shares There are 13.6 million shares outstanding. The bonds are sold at par, which means the coupon rate equals the market interest rate. Hence the current value of debt is \\( \\$ 102.4 \\) millions and the tax rate is \37.5. \\( \\mathrm{PV}(\\mathrm{ITS})=102.4 * 0.375=38.4 \\) millions VU \\( =29.03 * 13.6=394.808 \\) millions \\( \\mathrm{VL}=394.808+38.4=433.208 \\) millions Share price \\( =433.208 / 13.6=31.8535294118=\\$ 31.85 \\) per share Part B: PV of Financial distress cost Due to financial distress, the share price rise is only to \\( \\$ 30.76 \\) per share. There are 13.6 million shares outstanding. \\[ \\begin{aligned} \\text { PV of financial distress } & =(31.8535294118-30.76) * 13.6 \\\\ & =14.872 \\\\ & =\\$ 14.87 \\text { millions } \\end{aligned} \\] Answer Key: ta1: Price \\( _{\\text {TaxesOnly }}=\\$ 31.853529 \\) ta2: PV \\( _{\\text {DistressCosts }}=\\$ 14.872000 \\) million Other values: \\[ \\begin{array}{l} \\mathrm{MV}_{\\mathrm{E}(\\mathrm{U})}=\\$ 394.808 \\text { million } \\\\ \\mathrm{MV}_{\\mathrm{D}}=\\$ 102.400 \\text { million } \\\\ \\mathrm{V}_{\\mathrm{U}}=\\$ 394.808 \\text { million } \\end{array} \\]