Question

Milton Industries expects free cash flows of $ 12 million each year.​ Milton's corporate tax rate is 35 %​, and its unlevered cost of capital is 11 %. Milton also has outstanding debt of $ 47.76 ​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? a. What is the value of Milton Industries without​ leverage? The value of Milton Industries without leverage is ​$ nothing million. ​ (Round to two decimal​ places.)

Answer 1

a. What is the value of Milton Industries without​ leverage?

= Expected free cash flows/Unlevered cost of capital

= $12,000,000 / 11%

= 109090909.0909091

= $10.91 million

b. What is the value of Milton Industries with​ leverage?

= Unlevered cash flows + Corporate tax rate*Outstanding debt

= $109,090,909 + 35%*$47,760,000

= $109,090,909 + $16,716,000

= 125806909

= $12.58 million