a Two firms that have the same annual net operating income of $20,000, but firm U uses 100% equity financing with a cost of equity of 10% and firm L has a capital structure of 30% debt (perpetual debt of $40,000 with a coupon of 5% and 70% equity (cost of equity = 11.25%). Both firms are of similar risk and payout 100% of their profits. Part 1) What is the market value for U and L if we assume perfect capital markets and no taxes? If there is a difference, where does it come from? WRITE HERE: Part 2) What is the market value of U and L if we assume perfect capital markets and corporate taxes are 26%? If there is a difference, where does it come from? WRITE HERE: Model parameters Net operating income for U and L Tax rate Debt for U Debt for L Cost of debt for L Cost of equity for U Cost of equity for L Firm L #N/A #N/A Net operating income (i.e., EBIT) Less interest payments Income before taxes Less corporate taxes Income available to stockholders Total income available to security holders Market value of equity Market value of debt Market value of the firm PV of the tax shield on interest #N/A #N/A #N/A #N/A #N/A #N/A $ $ Firm Value for Part 1 Firm U #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A Firm Value Part 2 Firm U #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A Firm L #N/A #N/A Net operating income (i.e., EBIT) Less interest payments Income before taxes Less corporate taxes Income available to stockholders Total income available to security holders Market value of equity Market value of debt Market value of the firm PV of the tax shield on interest #N/A #N/A #N/A #N/A #N/A $ #N/A