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Market Value / Total Value

Firm L has debt with a market value of $200,000 and a yield of 9%. The firm's equity has a market value of $300,000, its earnings are growing at a 5% rate, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. Under the MM extension with growth, what would Firm L's total value be if it had no debt?

a. $358,421

b. $377,286

c. $397,143

d. $417,000

e. $437,850

Solution Preview

Value with debt = Value Levered = Value unlevered + Tax Shield from debt
Value levered = 200,000+300,000 = 500,000
Debt amount ...

Solution Summary

The solution is given in about a paragraph's worth of calculations.