Quillpen Company is unlevered and has a value of $45 billion. An otherwise identical but levered firm finances 25% of its capital structure with debt. Under the MM zero-tax model, what is the value of the levered firm? Enter your answer in billions. For example, an answer of $1 billion should be entered as 1, not 1,000,000,000. Round your answer to the nearest whole number.

Question

Kara Hanna

Business

14 January, 05:40

Quillpen Company is unlevered and has a value of $45 billion. An otherwise identical but levered firm finances 25% of its capital structure with debt. Under the MM zero-tax model, what is the value of the levered firm? Enter your answer in billions. For example, an answer of $1 billion should be entered as 1, not 1,000,000,000. Round your answer to the nearest whole number.

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Answers (1)

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Carlos Paul · Answer 1

We can conclude that the value of levered firm is 40 billion.

Explanation:

Under the MM zero tax model value of levered firm is equal to value of unleveled firm

Under MM zero tax model VL = VU

VL = value of levered firm

VU = value of unleveled firm

Value of levered firm = value of unleveled firm + (tax rate * value of debt)

Firm capital structure is included debt and equity, when there is no tax it means value of levered and unleveled firm value is same

Therefore, We can conclude that the value of levered firm is 40 billion.