Levered, Inc., and Unlevered, Inc., are identical in every way except their capi

Question

Levered, Inc., and Unlevered, Inc., are identical in every way except their capital structures. Each company expects to earn $28.2 million before interest per year in perpetuity, with each company distributing all its earnings as dividends. Levered’s perpetual debt has a market value of $83 million and costs 8 percent per year. Levered has 1.5 million shares outstanding, currently worth $123 per share. Unlevered has no debt and 3.7 million shares outstanding, currently worth $71 per share. Neither firm pays taxes. What is the value of each firm? (Enter your answers in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) Value of the firm Unlevered $ Levered $

Explanation / Answer

Since unlevered is having no debt, it is only equity firm and hence its value will be equal to amrket value of equity

Hence, Value of unlevered(assets is equal to equity)=3.7*71=262.7 million

According to MM1, levered value is equal to unlevered value in absence of taxes

hence, Value of levered=262.7 million as well

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