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Levered, Inc., and Unlevered, Inc., are identical in every way except their capital structures. Each company...

Levered, Inc., and Unlevered, Inc., are identical in every way except their capital structures. Each company expects to earn $29.7 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 $98 million and costs 9 percent per year. Levered has 3 million shares outstanding, currently worth $112 per share. Unlevered has no debt and 5.2 million shares outstanding, currently worth $87 per share. Neither firm pays taxes.

a. 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 $?

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Answer #1

Levered Inc.:

Value of Debt = $98,000,000
Number of Shares Outstanding = 3,000,000
Current Price per share = $112

Value of Levered Firm = Value of Debt + Number of Shares Outstanding * Current Price per share
Value of Levered Firm = $98,000,000 + 3,000,000 * $112
Value of Levered Firm = $98,000,000 + $336,000,000
Value of Levered Firm = $434,000,000

Unlevered Firm:

Number of Shares Outstanding = 5,200,000
Current Price per share = $87

Value of Unlevered Firm = Number of Shares Outstanding * Current Price per share
Value of Unlevered Firm = 5,200,000 * $87
Value of Unlevered Firm = $452,400,000

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