Question: Consider 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

Consider 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%.

What is the value of each firm and what is the cost of capital for each firm?

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