Question

MM Model with Corporate Taxes An unlevered firm has a value of $700 million. An otherwise...

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 $1.2 million should be entered as 1.2, not 1,200,000.

$   million

Homework Answers

Answer #1

MM Model with corporate taxes states that if debt is added in the capital structure then there will be interest expense which will lead to interest tax shield which in return will decrease the taxes and will increase the foirm value

Value of the levered firm = Value of the unlevered + PV of the interest tax shield calculated at cost of debt

Here it is given that value of the unlevered firm is $700 M and the firm is identical to the other levered firm.

Value of unlevered firm = 700

Interest = 140*4% = $5.6 M

Interest Tax shield = 5.6 * 35% = 1.96

Cost of debt = 4%

PV of interest tax shield = interest tax shield / cost of debt

= 1.96 / 0.04

= $49 million

Value of levered firm = 700 + 49

= $749 Million

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
An unlevered firm has a value of $700 million. An otherwise identical but levered firm has...
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....
Compressed APV Model with Constant Growth An unlevered firm has a value of $700 million. An...
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 rate. Its cost of debt is 6% 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 2%. Assuming the corporate tax rate is 35%, use the compressed adjusted present value model to determine...
An unlevered firm has a value of $800 million. An otherwise identical but levered firm has...
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...
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....
Problem 21-03 Compressed APV Model with Constant Growth An unlevered firm has a value of $850...
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...
Quillpen Company is unlevered and has a value of $40 billion. An otherwise identical but levered...
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.
Mill Co. is all equity financed and has value of $600 billion. Otherwise identical but levered...
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
Miller Model with Corporate and Personal Taxes Cruz Corporation has $150 billion of debt outstanding. An...
Miller Model with Corporate and Personal Taxes Cruz Corporation has $150 billion of debt outstanding. An otherwise identical firm has no debt and has a market value of $500 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...
MM with Corporate Taxes Companies U and L are identical in every respect except that U...
MM with Corporate Taxes Companies U and L are identical in every respect except that U is unlevered while L has $10 million of 6% bonds outstanding. Assume that: (1) All of the MM assumptions are met. (2) Both firms are subject to a 40% federal-plus-state corporate tax rate. (3) EBIT is $3 million. (4) The unlevered cost of equity is 9%. What value would MM now estimate for each firm? (Hint: Use Proposition I.) Enter your answers in millions....
MM with Corporate Taxes Companies U and L are identical in every respect except that U...
MM with Corporate Taxes Companies U and L are identical in every respect except that U is unlevered while L has $12 million of 6% bonds outstanding. Assume that: (1) All of the MM assumptions are met. (2) Both firms are subject to a 40% federal-plus-state corporate tax rate. (3) EBIT is $3 million. (4) The unlevered cost of equity is 10%. What value would MM now estimate for each firm? (Hint: Use Proposition I.) Enter your answers in millions....
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT