Unlevered Corporation (Firm U) has a total market value of $500,000 – a tax rate of 40% and EBIT of $100,000. Levered Corporation (Firm L) is identical in all respects to Firm U, BUT Firm L has $200,000 market (and book) value of debt outstanding. Firm L pays total annual interest of $16,000 on this debt. Both firms satisfy the MM assumptions.
a) What is the value of Firm L, according to MM’s Proposition I with corporate taxes?
b) What is the Firm U’s cost of equity?
c) What if Firm L’s cost of equity?
d) What is Firm L’s WACC?

  • CreatedSeptember 19, 2013
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