Companies U and L are identical in every respect except that U is unlevered while L has
Question:
Companies U and L are identical in every respect except that U is unlevered while L has $10 million of 5% bonds outstanding. Assume:
(1) All of the MM assumptions are met.
(2) Both firms are subject to a 25% federal-plus-state corporate tax rate.
(3) EBIT is $2 million.
(4) The unlevered cost of equity is 10%.
a. What value would MM now estimate for each firm?
b. What is rs for Firm U? For Firm L?
c. Find SL , and then show that SL + D = VL results in the same value as obtained in part a.
d. What is the WACC for Firm U? For Firm L?
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Related Book For 
Intermediate Financial Management
ISBN: 9780357516669
14th Edition
Authors: Eugene F Brigham, Phillip R Daves
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