Value of a firm with and without leverage
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Milton Industries expects free cash flow of $5 million each year. Milton'scorporate 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.
a. What is the value of Milton Industries without leverage?
b. What is the value of Milton Industries with leverage?
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The solution explains how to calculate the value of a firm with and without leverage
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a. The value is the present value of all free cash flows. Since the cash flows are a perpetuity, the present value = Annual free cash flow/Cost of ...
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