Unlevered Corporate (FIRM U) has a total value of shs 500,000,000, a tax rate of 40% and earnings before interest and taxes (EBIT) of shs 100,000,000.

Levered Corporation (FIRM L) is identical in all respects to firm U, but firm L has shs 200,000,000 market (and book) value of debt outstanding. Firm L pays total annual interest of shs 16,000,000 on this debt. Both firms satisfy the MM assumptions.

Required:

a.What is the value of firm L according to MM's proposition I?(2 Marks)

b.What is firm U's cost of equity?(2 Marks)

c.What is firm L's cost of equity?(2 Marks)

d.What is firm L's weighted average cost of capital (WACC)(2 Marks)

e.An alternative equitation for a firm's cost of capital is WACC = EBIT (1-T)/ V.

What is firm L's WACC according to this formula?(2 Marks)