An unlevered firm has a value of $850 million. An otherwise identical but levered firm has $80 million in debt at a 3% interest rate, which is its pre-tax cost of debt. 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 4%. Assuming the corporate tax rate is 25%, use the compressed adjusted present value model to determine the value of the levered firm. (Hint: The interest expense at Year 1 is based on the current level of debt.) Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answer to two decimal places.
An unlevered firm has a value of $850 million. An otherwise identical but levered firm has $80 million in debt at a 3% interest rate, which is its pre-tax cost of debt. 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 4%. Assuming the corporate tax rate is 25%, use the compressed adjusted present value model to determine the value of the levered firm. (Hint: The interest expense at Year 1 is based on the current level of debt.) Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answer to two decimal places.
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter17: Dynamic Capital Structures And Corporate Valuation
Section: Chapter Questions
Problem 3P
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An unlevered firm has a value of $850 million. An otherwise identical but levered firm has $80 million in debt at a 3% interest rate, which is its pre-tax cost of debt. 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 4%. Assuming the corporate tax rate is 25%, use the compressed adjusted present value model to determine the value of the levered firm. (Hint: The interest expense at Year 1 is based on the current level of debt.) Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answer to two decimal places.
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