Modigliani and Miller's world of taxes. Roxy Broadcasting was originally an all-equity firm with a before-tax value of . Roxy now pays taxes at a % rate. What is the value of Roxy under the / debt-to-equity capital structure? Under the / capital structure? What is the value of Roxy under the / debt-to-equity capital structure?

Complete Question:

Modigliani and Miller's world of taxes. Roxy Broadcasting was originally an all-equity firm with a before-tax value of $20,000,000. Roxy now pays taxes at a 30% rate.

A. What is the value of Roxy under the 30/70 debt-to-equity capital structure?

B. Under the 70/30 capital structure?

Requirement 1: $15,384,615

Requirement 2: $17,721,519

Explanation:

The value of the firm at zero percent debt is $20,000,000 then this means:

Value of Equity After Tax = Value of Firm * (1 - 30% Tax rate)

Value of Equity After Tax = $20,000,000 * 0.7 = $14,000,000

Now

Value of Levered Firm = Value of Unlevered Firm + (Debt percentage * Value of Levered Firm * Tax rate

Requirement 1: The value of levered company at 30/70 debt to equity ratio would be:

Here

Value of Levered Firm is X

Debt percentage is 30%

Tax rate is 30%

By putting values, we have:

X = $14,000,000  + (30% debt percentage * X * 30% Tax rate)

X = $14,000,000  + (0.3 * X * 0.3)

X = $14,000,000 + (0.09X)

X - 0.09X = $14,000,000

0.91X = $14,000,000

X = $14,000,000 / 0.91 = $15,384,615

Requirement 2: The value of levered company at 70/30 debt to equity ratio would be:

Here

Value of Levered Firm is X

Debt percentage is 70%

Tax rate is 30%

By putting values, we have:

X = $14,000,000  + (70% debt percentage * X * 30% Tax rate)

X = $14,000,000  + (0.7 * X * 0.3)

X = $14,000,000 + (0.21X)

X - 0.21X = $14,000,000

0.79X = $14,000,000

X = $14,000,000 / 0.79 = $17,721,519

answer; measurable outcome;