Milton Industries expects free cash flows of $14 million each year. Milton's corporate tax rate is 30%, and its unlevered cost of capital is 10%. Milton also has outstanding debt of $60.57 million, and it expects to maintain this level of debt permanently. a. What is the value of Milton Industries without leverage? b. What is the value of Milton Industries with leverage?
Answer to Part a.:
Value of Firm without Leverage = Free Cash Flow / Unlevered Cost
of Capital
Value of Firm without Leverage = 14 Million / 0.10
Value of Firm without Leverage = $140 Million
Answer to Part b.:
Value of Firm with Leverage = Value of Firm without Leverage +
Tax Rate * Debt
Value of Firm with Leverage = $140 Million + ($60.57 Million *
0.30)
Value of Firm with Leverage = $140 Million + $18.171 Million
Value of Firm with Leverage = $158.171 Million
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