# Problem 21-03 Compressed APV Model with Constant Growth An unlevered firm has a value of \$850 million. An otherwise identical but levered firm has \$80 million in debt at a 7% interest rate. Its cost of debt is 7% and its unlevered cost of equity is 11%. After Year 1, free cash flows and tax savings are expected to grow at a constant rate of 4%. Assuming the corporate tax rate is 40%, use the compressed adjusted present value model to determine the value of the levered firm. (Hint: The interest expense at Year 1 is based on the current level of debt.) Enter your answer in millions. For example, an answer of \$1.2 million should be entered as 1.2, not 1,200,000. Do not round intermediate calculations. Round your answer to two decimal places. \$ million

Appreciate of unlevered fixed = 850 darling

tribute profit of a levered fixed = 40% x 80 = 32 darling

As playing currency flows and tribute savings are expected to expand at a constant expandth of 4%

so profit can be adapted as a expanding annuity

Benefits = 32 darling x 7% x (1+4%)/(7%-4%) = 77.653 darling

appreciate of levered fixed =adjusted introduce appreciate = appreciate of unlevered fixed + obligation tribute profits

= 850 + 77.653 = 927.653

appreciate of the levered fixed = \$ 927.65 darling