Milton Industries expects free cash flow of $10 million each year. Milton's corporate tax rate is...
Milton Industries expects free cash flow of $10 million each year. Milton's corporate tax rate is 38%, and its unlevered cost of capital is 10%. Milton also has an outstanding debt of $50.45 million, and it expects to maintain this level of debt permanently.
. What is the value of Milton Industries without leverage? b. What is the value of Milton Industries with leverage?
Homework Answers
| Solution: | ||
| a. | Value (without leverage) unlevered | $100 million |
| Working Notes: | ||
| Value (without leverage) unlevered | ||
| =Free cash flow/unlevered cost of capital | ||
| =$10 million/10% | ||
| =$100 million | ||
| Notes: | Unlevered value of firm means no debt in the firm, unlevered cash flow is considered for computation unlevered value of firm. | |
| b. | Value (with leverage) Levered | $119.17 million |
| Working Notes: | ||
| Value (with leverage) Levered | ||
| = Unlevered value + tax rate x debt | ||
| =$100 million + 38% x $50.45 million | ||
| =$100 million + $19.171 million | ||
| =$119.171 million | ||
| =$119.17 million | ||
| Notes: | Levered value of firm considered debt in the firm for valuation of the firm. | |
| Please feel free to ask if anything about above solution in comment section of the question. | ||
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