Use the information for the question(s)below.
Shepard Industries expects free cash flow of $10 million each year.Shepard's corporate tax rate is 21%,and its unlevered cost of equity is 10%.The firm also has outstanding debt of $40 million and it expects to maintain amount of debt permanently.
-The value of Shepard Industries with leverage is closest to:

Question

Quizplus · Accepted Answer

To calculate the value of Shepard Industries with leverage, we need to use the following formula:

Value of the firm = Value of the firm unlevered + Present value of the interest tax shield (PVITS) - Value of debt

Value of the firm unlevered = Free cash flow / unlevered cost of equity 
Value of the firm unlevered = $10 million / 10% 
Value of the firm unlevered = $100 million

PVITS = (Corporate Tax Rate)*(Debt) / (Unlevered Cost of Equity) 
PVITS = (21%)*($40 million) / 10% 
PVITS = $84 million

Value of the firm = $100 million + $84 million - $40 million 
Value of the firm = $144 million - $40 million 
Value of the firm = $104 million

The closest value to $104 million is option D) $108.4 million.

Use the Information for the Question(s)below