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Suppose a levered firm has a current value of $15,000,000. Suppose that the firm currently has...

Suppose a levered firm has a current value of $15,000,000. Suppose that the firm currently has a tax rate of 35%. Suppose the firm would have a value of $12,800,000 without debt.

a) What is the equity worth at this firm?

b) If the firm wants to raise $10,000,000 in debt, what will the firm be worth?

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Answer #1

Answer a.

Value of Unlevered Firm = $12,800,000
Value of Levered Firm = $15,000,000

Value of Levered Firm = Value of Unlevered Firm + Tax Rate * Value of Debt
$15,000,000 = $12,800,000 + 0.35 * Value of Debt
$2,200,000 = 0.35 * Value of Debt
Value of Debt = $6,285,714.29

Value of Equity = Value of Levered Firm - Value of Debt
Value of Equity = $15,000,000 - $6,285,714.29
Value of Equity = $8,714,285.71

Answer b.

Value of Levered Firm = Value of Unlevered Firm + Tax Rate * Value of Debt
Value of Levered Firm = $12,800,000 + 0.35 * $10,000,000
Value of Levered Firm = $16,300,000

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