Milton Industries expects free cash flow of $5 million each year. Milton's corporate tax rate is 35%, and its unlevered cost of

Question

3 years ago

9

Milton Industries expects free cash flow of $5 million each year. Milton's corporate tax rate is 35%, and its unlevered cost of

capital is 15%. The firm also has outstanding debt of $19.05 million, and it expects to maintain this level of debt permanently. What is the value of Milton Industries without leverage? What is the value of Milton Industries with leverage?

Business

1 answer:

bija089 [108] · Answer 1 · 2022-01-19T09:22:06+03:00

Answer:

1. $33.33 million

2. $40.00 million

Explanation:

The computation of the value of Milton Industries with leverage is shown below:-

Value of Milton Industries without leverage is

= Free cash flow ÷ unlevered cost of capital

= $5 million ÷ 0.15

= $33.33 million

Value of Milton Industries with leverage is

= Value of Milton Industries without leverage + Tax × Debt

= $33.33 million + 0.35 × $19.05 million

= $40.00 million

Therefore we have applied the above formula.