Question

Milton Industries expects free cash flows of $14 million each year. Milton's corporate tax rate is...

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?

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Answer #1

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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