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19 March, 06:51

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.

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  1. 19 March, 09:34
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    The value of the levered firm is $917.35 million

    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)
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