An unlevered firm has a value of $475 million. An otherwise identical but levered firm has $75...

Question:

An unlevered firm has a value of $475 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?

Modigliani-Miller Theorem:

The Modigliani-Miller theorem, named after Franco Modigliani and Merton Miller, is a theory that relates the value of a firm to its capital structure. The theorem states that when there is no tax, firm value is independent of capital structure.

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The value of the levered firm is $475 million.

According to the Modigliani-Miller Theorem, when there is no tax, firm value does not depend on...

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Capital Structure & the Cost of Capital

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Chapter 15 / Lesson 1
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In this lesson, we'll define capital and a firm's capital structure. We'll also discuss the costs associated with each component in the capital structure and learn about the concept of risk and return.


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