An unlevered firm has a value of $625 million. An otherwise identical but levered firm has $75 million in debt. Under the MM zero-tax model, what is the value of the levered firm? Enter your
An unlevered firm has a value of $625 million. An otherwise identical but levered firm has $75 million in debt. Under the MM zero-tax model, what is the value of the levered firm? Enter your
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![**MM Model with Zero Taxes**
An unlevered firm has a value of $625 million. An otherwise identical but levered firm has $75 million in debt. Under the MM zero-tax model, what is the value of the levered firm? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to the nearest whole number.
\[ \boxed{\phantom{nnnn}} \] million](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fe9d9a5f0-fe4e-422d-8c50-a22c93ec0936%2Fe61297a4-3fa0-47af-8b5b-314750ca6d68%2F71k7f6_processed.jpeg&w=3840&q=75)
Transcribed Image Text:**MM Model with Zero Taxes**
An unlevered firm has a value of $625 million. An otherwise identical but levered firm has $75 million in debt. Under the MM zero-tax model, what is the value of the levered firm? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to the nearest whole number.
\[ \boxed{\phantom{nnnn}} \] million
Expert Solution
Step 1 Analysis
MM Model with zero tax assumption that in completely efficient markets, businesses pay no taxes. As a result, the company with a 100% leveraged capital structure does not profit from interest payments that are tax deductible.
Value of unlevered firm =Value of levered firm
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