17-2: Companies U and L are identical in every respect except that U is unlevered while L has $12 million of 6% 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 $2.5 million. (4) The unlevered cost of equity is 12%.

a. What value would MM now estimate for each firm? {Hint: Use Proposition I.}

b. What is r, for Firm U? For Firm L?

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

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