Question

Find the value of levered equity for this firm.

Assume the firm has perpetual cash flows. Use Miller &
Modigiiani's Proposition II concerning the

cost of equity.

You have the following information about the firm:

EBIT = $100 million

Tax rate - 35%

Debt = $150 million

Cost of debt = 8%

Unlevered cost of capital = 12%

Answer #1

Value of Unlevered Firm = EBIT * (1 - Tax Rate) / Unlevered Cost
of Capital

Value of Unlevered Firm = $100.00 million * (1 - 0.35) / 0.12

Value of Unlevered Firm = $100.00 million * 0.65 / 0.12

Value of Unlevered Firm = $541.67 million

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

Value of Levered Firm = $541.67 million + 0.35 * $150.00
million

Value of Levered Firm = $541.67 million + $52.50 million

Value of Levered Firm = $594.17 million

Value of Levered Equity = Value of Levered Firm - Value of
Debt

Value of Levered Equity = $594.17 million - $150.00 million

Value of Levered Equity = $444.17 million

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