Question

Find the value of levered equity for this firm. Assume the firm has perpetual cash flows....

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%

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Homework Answers

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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