Question

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

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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