Answer: $543,331.37
Explanation:
According to MM Proposition I with taxes, the value of a leveraged firm is equal to the value of the Unlevered firm (VU) plus the present value of the interest tax shield.
To calculate it, one uses the following formula,
VL =Vu+ Te * D
Where,
Te = the corporate tax rate
D = the amount of debt.
First then we would need to calculate Vu, the Unlevered value of the firm.
Listing the figures we have,
Expected EBIT of $65,000 forever Tax rate of 21%
Outstanding Debt is $190,000 Interest rate on debt is 4.3% Unlevered cost of capital is 10.2%
Solving for the value of the Unlevered firm we have,
Value of Unlevered firm (Vu) = EBIT (1-T) /RU
= $ 65000 ( 1-T) / RU
= $ 65000 (1- 0.21) /0.102
= $503,431.37
That is the Unlevered Value.
Now we can find the value of the levered firm as
VL =Vu+ Te *D
Value of levered firm,
= $503,431.37 + 0.21(190,000)
= $543,331.37
Therefore, the value of levered firm according to M&M Proposition I is $543,331.37.
