Seattle Steel Products Case Study

3. Using Seattle Steel's projected 1993 EBIT of $3.0 million, and assuming that the MM con-

1) with a 15 per-

ditions hold, we can compare Seattle Steel's value as an unlevered firm (Vy) with a 15 percent cost of equity (k

St), with the value the firm would have, under the MM no-tax model, if

it had $10 million of 10 percent debt (V, ).

1. What are the values for Vu, V,, and k?
2. Use the WACC formula to find Seattle Steel's WACC if it used debt financing.
3. Use the formula WACC = EBIT/V to verify that Firm L's WACC is 15 percent.
4. Graph the MM no-tax relationships between capital costs and leverage, plotting D/V on the horizontal axis. Also, graph the relationship between the firm's value and D/V.