Answer: $1.3 billion.

## Explanation According to Modigliani and Miller's Proposition I with taxes, the value of a levered firm (V_L) is equal to the value of an unlevered firm (V_U) plus the present value of the tax shield from debt: **Formula:** V_L = V_U + (Tax Rate × Debt) Where: - V_L = Value of levered company = $1.5 billion - Debt = $0.6 billion - Tax Rate = 30% = 0.30 **Calculation:** V_L = V_U + (Tax Rate × Debt) 1.5 = V_U + (0.30 × 0.6) 1.5 = V_U + 0.18 V_U = 1.5 - 0.18 = 1.32 billion **Interpretation:** When the company issues common stock to repay outstanding debt, it becomes unlevered. The value of the unlevered company (V_U) is $1.32 billion, which is closest to $1.3 billion. **Why not the other options:** - **A ($0.9 billion):** This would be V_L - Debt (1.5 - 0.6 = 0.9), which ignores the tax shield benefit. - **C ($1.5 billion):** This is the current levered company value, not the unlevered value. **Key Concept:** In a world with corporate taxes, debt financing creates value through the tax deductibility of interest payments, making levered firms more valuable than unlevered firms.

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