A firm is currently financed with 40% equity and 60% debt.The firm generates perpetual earnings after taxes and interest payments of $2 million per year.The firm's cost of equity is 12%,its cost of debt is 5%,and it has a tax rate of 40%.What is the value of the levered firm?

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The value of the levered firm is $30.3 million. This is calculated as follows:Value of the levered firm = Value of the unlevered firm / (1 - Debt-to-equity ratio)Value of the unlevered firm = Earnings after taxes and interest payments / Cost of equityValue of the unlevered firm = $2 million / 0.12 = $16.67 millionDebt-to-equity ratio = Debt / EquityDebt-to-equity ratio = $60% / $40% = 1.5Value of the levered firm = $16.67 million / (1 - 1.5) = $30.3 million

A Firm Is Currently Financed with 40% Equity and 60