Question: Pitmann Ltd and Markov Ltd have identical expected operating cash flows of $600 million in perpetuity, but Pitmann is financed entirely by equity, while

Pitmann Ltd and Markov Ltd have identical expected operating cash flows of $600 million in perpetuity, but Pitmann is financed entirely by equity, while Markov's capital structure includes 30 percent debt and 70 percent equity finance. Assume that the assumptions of a perfect capital market hold (including the assumption of risk-free debt), the measured equity beta for Pitmann is 0.8, the yield on ten-year Government bonds is 6 percent and the market risk premium is 7 percent. Each firm has 500 million shares on issue. What is the theoretical firm value for Markov Ltd, rounded to the nearest $100 million?

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