Question

Milton Industries expects free cash flows of $14 million each year. Milton's corporate tax rate is 21%, and its unlevered cost of capital is 15%. Milton also has outstanding debt of $23.44 million, and it expects to maintain this level of debt permanently. a) What is the value of Milton

Answer 1

A.$93 million

B.$97.92million

Step-by-step explanation:

a. Calculation for the value of Milton Industries without​ leverage

Using this formula

Value without leverage unlevered=Free cash flow/unlevered cost of capital

Let plug in the formula

Value without leverage unlevered=$14 million/15%

Value without leverage unlevered=$93 million

B. Calculation for the value of Milton Industries with​ leverage

Using this formula

Value with leverage Levered= Unlevered value + Tax rate x Debt

Let plug in the formula

Value with leverage Levered=$93 million + 21% x $23.44 million

Value with leverage Levered=$93 million + $4.92 million

Value with leverage Levered=$97.92million

Therefore Value without leverage unlevered will be $93 million while Value with leverage Levered will be $97.92million.