Question

Mill Co. is all equity financed and has value of $600 billion.

Otherwise identical but levered firm with 30% debt at 6% interest rate. No growth is expected.

Please using mm with corporate tax model to determine the value of a levered firm assuming tax rate of 25.

1) $700 billion

2)$600 billion

3) $645 billion

4) $852 billion

5) Not enough information

Answer #1

**3) $645 billion**

The value of levered firm = the valued of unlevered firm + PV of interest tax shield

the valued of unlevered firm = $600 billion

Total debt = 30% of $600 billion = $180 billion

Interest rate per year = 6%*$180 billion = $10.8 billion

Interest rate tax shield per year = 0.25*$10.8 billion = $2.7 billion

This shield is for every year till perpetuity

PV of interest tax shield = $2.7 billion /0.06 = $45 billion

Hence, The value of levered firm = $600 billion + $45 billion = $645 billion

Arnold Co. has $200 billion of debt outstanding. An otherwise
identical firm has no debt and has a market value of $700 billion.
Under the Miller model, what is Arnold’s value if the
federal-plus-state corporate tax rate is 25%, the effective
personal tax rate on stock is 20%, and the personal tax rate on
debt is 30%?

MM Model with Corporate Taxes
An unlevered firm has a value of $700 million. An otherwise
identical but levered firm has $140 million in debt at a 4%
interest rate. Its cost of debt is 4% and its unlevered cost of
equity is 11%. No growth is expected. Assuming the corporate tax
rate is 35%, use the MM model with corporate taxes to determine the
value of the levered firm. Enter your answer in millions. For
example, an answer of...

Quillpen Company is unlevered and has a value of $40 billion. An
otherwise identical but levered firm finances 20% of its capital
structure with debt. Under the MM zero-tax model, what is the value
of the levered firm? Enter your answer in billions. For example, an
answer of $1 billion should be entered as 1, not 1,000,000,000.
Round your answer to the nearest whole number.

An unlevered firm has a value of $700 million. An otherwise
identical but levered firm has $40 million in debt at a 6% interest
rate. Its cost of debt is 6% and its unlevered cost of equity is
10%. After Year 1, free cash flows and tax savings are expected to
grow at a constant rate of 2%. Assuming the corporate tax rate is
35%, use the compressed adjusted present value model to determine
the value of the levered firm....

An unlevered firm has a value of $800 million. An otherwise
identical but levered firm has $40 million in debt at a 4% interest
rate. Its cost of debt is 4% and its unlevered cost of equity is
12%. After Year 1, free cash flows and tax savings are expected to
grow at a constant rate of 3%. Assuming the corporate tax rate is
40%, use the compressed adjusted present value model to determine
the value of the levered firm....

An unlevered firm has a value of $750 million. An otherwise
identical but levered firm has $40 million in debt at a 6% interest
rate. Its cost of debt is 6% and its unlevered cost of equity is
10%. After Year 1, free cash flows and tax savings are expected to
grow at a constant rate of 3%. Assuming the corporate tax rate is
40%, use the compressed adjusted present value model to determine
the value of the levered firm....

Cruz Corporation has $100 billion of debt outstanding. An
otherwise identical firm has no debt and has a market value of $650
billion. Under the Miller model, what is Cruz’s value if the
federal-plus-state corporate tax rate is 28%, the effective
personal tax rate on stock is 17%, and the personal tax rate on
debt is 29%? Enter your answer in billions. For example, an answer
of $1.23 billion should be entered as 1.23, not 1,230,000,000.
Round your answer to...

Compressed APV Model with Constant Growth
An unlevered firm has a value of $700 million. An otherwise
identical but levered firm has $70 million in debt at a 6% interest
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12%. After Year 1, free cash flows and tax savings are expected to
grow at a constant rate of 2%. Assuming the corporate tax rate is
35%, use the compressed adjusted present value model to determine...

Problem 21-03
Compressed APV Model with Constant Growth
An unlevered firm has a value of $850 million. An otherwise
identical but levered firm has $80 million in debt at a 7% interest
rate. Its cost of debt is 7% and its unlevered cost of equity is
11%. After Year 1, free cash flows and tax savings are expected to
grow at a constant rate of 4%. Assuming the corporate tax rate is
40%, use the compressed adjusted present value model...

You are considering two identical firms, one levered and the
other unlevered. Both firms have expected EBIT of $21000. The value
of the unlevered firm (VU) is $120000. The corporate tax rate is
30%. The cost of debt is 9%, and the ratio of debt to equity is 1
for the levered firm. Use Modigliani and Miller's (1963)
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