Question

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.

Answer 1

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

Step-by-step 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.