Question

Milton Industries expects free cash flows of $11 million each year. Milton's corporate tax rate is 22%, and its unlevered cost of capital is 14%. Milton also has outstanding debt of $21.85 million, and it expects to maintain this level of debt permanently. What is the value of Milton Industries? Express your answer in $ million with two decimals.

Answer 1

Value of Milton industries assuming without leverage is computed as shown below:

= Free cash flow each year / unlevered cost of capital

= $ 11 million / 14%

= $ 78.57 million Approximately

Value of Milton industries assuming leverage is computed as shown below:

= value of firm without leverage + Amount of debt x tax rate

= ($ 11 million / 14%) + $ 21.85 million x 0.22

= $ 83.38 million Approximately

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