There is a $ 103 million investment that Wolf Corp. wants to make this year. It is looking at various ways to finance this investment. Wolf believes that, once the investment has been made, it will generate free cash flows of $ 26 million each year (the appropriate discount rate for this investment is 9.7%.) At the moment, they have 7.7 million shares outstanding, and it has no other assets or opportunities. There are corporate taxes and financial distress costs (i.e. M&M perfect capital markets assumptions do not hold here.)

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

b. If Wolf sells equity today to finance the investment, what is Wolf's share price?

Wolf decides to borrow the $ 103 million instead. The firm will pay interest only on this loan each year, and it will maintain an outstanding balance of $ 103 million on the loan into forever. But as a result of the leverage, Wolf expects their annual free cash flows to drop to $ 23.4 million (due to financial distress costs.) Wolf's corporate tax rate is 25.5%.

c. If Wolf borrows the capital to finance the investment, what is Wolf's share price today?

Answer rating: 100% (QA)

To calculate the NPV of Wolfs investment and the share price under different financing options we need to consider the cash flows discount rate and co... View the full answer