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17 December, 16:16

Milton Industries expects free cash flow of $5 million each year. Milton's corporate tax rate is 35%, and its unlevered cost of capital is 15%. The firm also has outstanding debt of $19.05 million, and it expects to maintain this level of debt permanently. What is the value of Milton Industries without leverage? What is the value of Milton Industries with leverage?

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  1. 17 December, 19:59
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    1. $33.33 million

    2. $40.00 million

    Explanation:

    The computation of the value of Milton Industries with leverage is shown below:-

    Value of Milton Industries without leverage is

    = Free cash flow : unlevered cost of capital

    = $5 million : 0.15

    = $33.33 million

    Value of Milton Industries with leverage is

    = Value of Milton Industries without leverage + Tax * Debt

    = $33.33 million + 0.35 * $19.05 million

    = $40.00 million

    Therefore we have applied the above formula.
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