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