Unlevered Corporation (Firm U) has a total market value of $500,000 a tax rate of 40%

Question:

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?

Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...