Answer:
(A) $93.33 million
(B) $98.25 million
Step-by-step 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