The value of the levered firm using MM model with corporate taxes model.

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Chapter 21, Problem 2P

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To calculate: The value of the levered firm using MM model with corporate taxes model.

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An unlevered firm has a value of $800 million. An otherwise identical butlevered firm has $60 million in debt at a 5% interest rate, which is its pretax cost of debt. Its unlevered cost of equity is 11%. No growth is expected.Assuming the corporate tax rate is 35%, use the MM model with corporatetaxes to determine the value of the levered firm.

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