Using Seattle Steel's projected 1993 EBIT of $3.0 million, and assuming that the MM con- ditions...

 

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Using Seattle Steel's projected 1993 EBIT of $3.0 million, and assuming that the MM con- ditions hold, we can compare Seattle Steel's value as an unlevered firm (V,,) with a 15 per- cent cost of equity (k,), with the value the firm would have, under the MM no-tax model, if it had $10 million of 10 percent debt (V,). a. What are the values for V, V, and k, ? b. Use the WACC formula to find Seattle Steel's WACC if it used debt financing., c. Use the formula WACC = EBIT/V to verify that Firm L's WACC is 15 percent. d. Graph the MM no-tax relationships between capital costs and leverage, plotting D/V on the horizontal axis. Also, graph the relationship between the firm's value and D/V. Using Seattle Steel's projected 1993 EBIT of $3.0 million, and assuming that the MM con- ditions hold, we can compare Seattle Steel's value as an unlevered firm (V,,) with a 15 per- cent cost of equity (k,), with the value the firm would have, under the MM no-tax model, if it had $10 million of 10 percent debt (V,). a. What are the values for V, V, and k, ? b. Use the WACC formula to find Seattle Steel's WACC if it used debt financing., c. Use the formula WACC = EBIT/V to verify that Firm L's WACC is 15 percent. d. Graph the MM no-tax relationships between capital costs and leverage, plotting D/V on the horizontal axis. Also, graph the relationship between the firm's value and D/V.

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Answer Part d In the below diagram X axis hows degree of ... View the full answer