Question - 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 $35 million, the risk of financial distress may cause it to lose some customers and receive less favorable 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 30%, the risk-free rate is 4%, the expected return of the market is 13%, and the beta of Marpor's free cash flows is 1.1 (with or without leverage).
a. Estimate Marpor's value without leverage.
b. Estimate Marpor's value with the new leverage.