In: Finance
Based on this model, if the original unlevered firm value is $100 million, the corporate tax rate is 20%, and the CFO is planning to carry out a leveraged recapitalization to add a permanent debt of $30 million. The interest rate for the debt is 6% for the coming year. The unlevered equity requires 10% annual return. What’s the levered firm value? What’s the value of levered equity?
If company takes debt, Value of firm will be Equal to Value of
unlevered firm + PV of interest tax shield
Debt= 30000000
Tax rate= 20%
PV of interest tax shield = Debt*Tax rate
30000000*20%
6000000
Unlevered value of firm= 100000000
Levered Value of Firm= unlevered value of Firm + pV of interest tax
shield
Levered Value of Firm =100000000 +6000000
106000000
Value of levered Equity = Levered value of Firm - debt
Amount
106000000 -30000000
76000000
So Levered Value of Firm is 106000000
Levered Value of Equity is 76000000