Question
In: Finance
Company Z was originally an all-equity firm with a before-tax value of $20,000,000. The company now...
Company Z was originally an all-equity firm with a before-tax value of $20,000,000. The company now pays taxes at a 20% rate.
a. What is the value of Company Z under the 30/70 debt-to-equity capital structure? $ ___________ (Round to the nearest dollar, do not use ($), (m) or (,) signs.)
b. What is the value of Company Z under the 70/30 debt-to-equity capital structure? $ ___________ (Round to the nearest dollar, do not use ($), (m) or (,) signs.)
Solutions
Expert Solution
Answer : As per MM Approach :
Value of Levered Firm = Value of Unlevered Firm + (Debt * Tax rate)
(a.) Value of Unlevered Firm = 20,000,000
Debt = 20,000,000 * 30%
= 6,000,000
Value of Levered Firm = 20,000,000 + (6,000,000 * 20%)
= 21,200,000
(b)
Value of Unlevered Firm = 20,000,000
Debt = 20,000,000 * 70%
= 14,000,000
Value of Levered Firm = 20,000,000 + (14,000,000 * 20%)
= 22,800,000
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