Udy

80.00%

$14,365

The value of the levered firm is estimated in Table 8.21 by aggregating the effects of the tax savings and the expected bankruptcy costs.

Table 8.21: Value of Disney with Leverage

Debt Ratio

$ Debt

Unlevered Firm Value

Tax Benefits

Expected Bankruptcy Cost

Value of Levered Firm

0%

$0

$65,294

$0

$2

$65,293

10%

$6,979

$65,294

$2,603

$2

$67,896

20%

$13,958

$65,294

$5,206

$249

$70,252

30%

$20,937

$65,294

$7,809

$2,230

$70,874

40%

$27,916

$65,294

$8,708

$9,250

$64,752

50%

$34,894

$65,294

$6,531

$14,365

$57,461

60%

$41,873

$65,294

$6,531

$14,365

$57,461

70%

$48,852

$65,294

$6,531

$14,365

$57,461

80%

$55,831

$65,294

$6,531

$14,365

$57,461

90%

$62,810

$65,294

$6,531

$14,365

$57,461

The firm value is maximized at between 20 and 30% debt, which is consistent with the results of the other approaches. These results are, however, very sensitive to both the estimate of bankruptcy cost as a percent of firm value and the probabilities of default.

apv.xls: This spreadsheet allows you to compute the value of a firm, with leverage, using the adjusted present value approach.

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