Use the compressed adjusted present value model

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Reference no: EM13909221

An unlevered firm has a value of $900 million. An otherwise identical but levered firm has $50 million in debt at a 5% interest rate. Its cost of debt is 5% and its unlevered cost of equity is 12%. After Year 1, free cash flows and tax savings are expected to grow at a constant rate of 2%. 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.

Reference no: EM13909221

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