Problem 17-2 MM Model with Corporate Taxes

An unlevered firm has a value of $800 million. An otherwise identical but levered firm has $200 million in debt at a 5% interest rate. Its cost of debt is 5% and its unlevered cost of equity is 11%. No growth is expected. Assuming the corporate tax rate is 35%, use the MM model with corporate taxes to determine the value of the levered firm. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000.

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