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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.

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Answer #1

  

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Value of Unlevered Firm = 40 bn

Value of Debt in Unlevered Firm = 40 bn * Debt Weight / Total WEight

= 40 bn * 20%

= 8 bn

Value of Levered Firm = value of unleverd Firm + value of Debt * Tax Rates

= 40 bn + 8 bn * 0%

= 40 bn

Value will be same as unlevered Firm.

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