Question: Consider the same two firms U and L - that are identical except for capital structure. Each firm expects EBIT of $650,000 each year forever.

Consider the same two firms U and L - that are identical except for capital structure. Each firm expects EBIT of $650,000 each year forever. Firm U has a cost of equity of 10% and Firm L has $2 million in perpetual debt with a coupon rate of 7%. There is no chance of bankruptcy, but earnings of each are taxed at a rate of 45%. What is the value of firm L?

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