APV Model with Constant Growth An unlevered firm has a value of $800 million. An
ID: 2758407 • Letter: A
Question
APV Model with Constant Growth
An unlevered firm has a value of $800 million. An otherwise identical but levered firm has $70 million in debt at a 4% interest rate. Its cost of debt is 4% and its unlevered cost of equity is 10%. 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 30%, 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 $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. Please show work.
ANSWER: $____million
Explanation / Answer
Answer:
Value of the Levered Firm = Value of the Unlevered Firm + Interest Tax Savings
=800+2.8*0.30
=800.84 million