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Milton Industries expects free cash flows of $ 4 million each year.​ Milton's corporate tax rate...

Milton Industries expects free cash flows of $ 4 million each year.​ Milton's corporate tax rate is 30 % and its unlevered cost of capital is 13 % Milton also has outstanding debt of $ 8.77 ​million, and it expects to maintain this level of debt permanently. a. What is the value of Milton Industries without​ leverage? to two decimal point b. What is the value of Milton Industries with​ leverage? to decimal point

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Answer #1

Answer a.

Expected FCF = $4.00 million
Unlevered Cost of Capital = 13.00%

Value of Unlevered Firm = Expected FCF / Unlevered Cost of Capital
Value of Unlevered Firm = $4.00 million / 0.13
Value of Unlevered Firm = $30.77 million

Answer b.

Value of Debt = $8.77 million
Tax Rate = 30%

Value of Levered Firm = Value of Unlevered Firm + Value of Debt * Tax Rate
Value of Levered Firm = $30.77 million + $8.77 million * 0.30
Value of Levered Firm = $30.77 million + $2.63 million
Value of Levered Firm = $33.40 million

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