Question

An unlevered firm has a value of $850 million. An otherwise identical but levered firm has $230 million in debt. Under the Miller model, what is the value of the levered firm if the corporate tax rate is 34%, the personal tax rate on equity is 25%, and the personal tax rate on debt is 30%? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

The value of the levered firm is $917.35 million

Step-by-step explanation:

To calcuate the value of the levered firm under the Miller Model, we have to use the following formula:

Value of levered firm (VL) = Value of unlevered firm(VU) + [1- { (1-Tc) * (1-Te) / (1-Td) } ] * Value of Debt (D)

= $850 million + [1 - { (1-0.34) * (1-0.25) / (1-0.30) } ] * $230 million

= $917.35 million. Value of levered firm (VL)