$17-7$ MM with Corporate Taxes

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. $(4)$ The unlevered cost of equity is $10\%.$

a$.$ What value would MM now estimate for each firm? $($Hint: Use Proposition I.$)$

b$.$ What is $r_s$ for Firm U'YFor Firm $L?$

c$.$ Find $S_L,$ and then show that $S_L+D=V_L$ results in the same value as obtained in Part a$.$

d$.$ What is the WACC for Firm U$?$ For Firm L$?$