Problem 15-4 Nonmarketed Claims Hornqvist, Inc., has debt outstanding with a fac
ID: 2657372 • Letter: P
Question
Problem 15-4 Nonmarketed Claims
Hornqvist, Inc., has debt outstanding with a face value of $4 million. The value of the firm if it were entirely financed by equity would be $18.1 million. The company also has 410,000 shares of stock outstanding that sell at a price of $36 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 $
Explanation / Answer
Value of levered firm = value of equity + value of debt* tax rate
= 18100000 + $4000000 * 0.35
=18100000 + $1400000
=$19500000
Market value of levered firm = value of debt + market value of equity
= $4000000 + (410000 * $36)
= $4000000 + $14760000
= $18760000
Value of levered firm = Market value of levered firm + value of Nonmarketed Claims or Financial distress costs
$19500000 = $18760000 + Financial distress costs
Financial distress costs = $740000