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Homework answers / question archive / Hornqvist, Inc

Hornqvist, Inc

Finance

Hornqvist, Inc., has debt outstanding with a face value of $5 million. The value of the firm if it were entirely financed by equity would be $18.4 million. The company also has 470,000 shares of stock outstanding that sell at a price of $31 per share. The corporate tax rate is 35 percent. What is the decrease in the value of the company due to expected bankruptcy costs? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)

 

Financial distress costs         $ ________________

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Computation of Financial Distress Costs:

Value of Levered Firm = Value of Unlevered Firm + Debt * Tax Rate

= $18,400,000 + $5,000,000 * 0.35

= $20,150,000

 

Market value of firm = Market price per share * No. of shares + Value of debt

= $31 * 470,000 + $5,000,000

= $19,570,000

 

Financial Distress Costs = $20,150,000 - $19,570,000 = $580,000

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