Question
An unlevered firm has a value of $850 million. An otherwise identical but levered firm has $40 million in debt at a 5% interest rate,
An unlevered firm has a value of $850 million. An otherwise identical but levered firm has $40 million in debt at a 5% interest rate, which is its pre-tax cost of debt. Its unlevered cost of equity is 12%. After Year 1, free cash flows and tax savings are expected to grow at a constant rate of 2%. Assuming the corporate tax rate is 30%, 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 answers 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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