Compressed adjusted present value model

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Reference no: EM133906091

Question

An unlevered firm has a value of $900 million. An otherwise identical but levered firm has $70 million in debt at a 3% interest rate, which is its pre-tax cost of debt. Its unlevered cost of equity is 11%. After Year 1, free cash flows and tax savings are expected to grow at a constant rate of 3%. Assuming the corporate tax rate is 25%, use the compressed adjusted present value model to determine the value of the levered firm. (Hint: The interest expense at Year 1 is based on the current level of debt.) Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations.

Reference no: EM133906091

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