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Studentka2010 [4]
2 years ago
13

19. Hockey Standard expects free cash flow of $7 million each year indefinitely. The company has outstanding debt of $30 million

with an interest rate of 10%. The company plans to keep this debt outstanding forever. The company’s unlevered cost of funds is 15%. The corporate tax is 40%. What is the levered value of the firm.
Business
2 answers:
xenn [34]2 years ago
7 0

Answer:

$47866666.67

Explanation:

The value of the levered firm equals the value of the unlevered firm plus the interest tax shield

First need to find the value of unlevered firm

Given

FCF = $7 mil

Debt = $10 mil

Interest rate = 10%

Tax rate = 40%

Ru= 15%

Vu= 7000000/0.15 =46.67 mil

Tax shield

= 30 000000*0.1 *0.40

=$1200000

VL= 46.67 mil +120000

    =$47866666.67

geniusboy [140]2 years ago
4 0

Answer:

Explanation:

Free cash flow (FCF) = $7 million

Corporate tax rate = 40%

Unlevered cost of capital = 15%

Outstanding debt = $30 million

Levered value of the firm = Value of unlevered firm+(Tax rate*Debt)

So, first we need to identify value of unlevered firm:

V = FCF/r = 7,000,000/0.15 = 46,666,667 = $46.66 million

r - cost of capital

Levered value of the firm = $46.66 million + (0.4*30 million) = $58.66 million

Hope this helps :)

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5 0
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