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14 April, 21:07

Milton Industries expects free cash flows of $14 million each year. Milton's corporate tax rate is 21%, and its unlevered cost of capital is 15%. Milton also has outstanding debt of $23.44 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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  1. 14 April, 21:16
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    (A) $93.33 million

    (B) $98.25 million

    Explanation:

    Milton expects a free cash flow of $14 million each year

    The corporate tax rate is 21%

    The unlevered cost of capital is 15%

    Milton has an outstanding debt of $23.44 million.

    (A) The value of Milton's industry without leverage can be calculated as follows

    = Free cash flow/unlevered cost of capital

    = $14 million/15%

    = $14 million/0.15

    = $93.33 million

    (B) The value of Milton with leverage can be calculated as follows

    = unlevered value + tax rate * debt

    = $93.33 million + 21% * $23.44 million

    = $93.33 million + 0.21 * $23.44 million

    = $93.33 million + $4.922 million

    = $98.25 million
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