(26–7)

Miller Model Companies U and L are identical in every respect except that U is unlevered while L has $10 million of 5% bonds outstanding. Assume that (1) all of the MM assumptions are met, (2) both firms are subject to a 40% federal-plus-state corporate tax rate, (3)

EBIT is $2 million, (4) investors in both firms face a tax rate of Td = 28% on debt income and Ts = 20% (on average) on stock income, and (5) the appropriate required pre-personal-tax rate rsU is 10%.