mework $($Ch $16)$

Question $5,$ P $16-29($similar to$)$

HW Score: $60\%,3$ of $5$ points

Part $1$ of $2$

Points: $0$ of $1$

Marpor Industries has no debt and expects to generate free cash flows of $$16$ million each year. Marpor believes that if it permanently increases its level of debt to $$30$ 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 $$15$ million per year. Suppose Marpor's tax rate is $40\%,$ the risk$-$free rate is $3\%,$ the expected return of the market is $16\%,$ and the beta of Marpor's free cash flows is $1\mathrm{.}2($with or without leverage$).$

a$.$ Estimate Marpor's value without leverage.

b$.$ Estimate Marpor's value with the new leverage.