An unlevered firm (=Firm U) and a leveraged firm (=Firm L) have identical operations but their financing decisions are different. Firm L borrowed $4,000,000 at a cost of 8%. The EBIT is expected to be $1,000,000 every year forever for both companies. Also assume that Dividend Payout Ratio is 100% and corporate tax rate is 40%.

Question: How much value will be added to Firm L due to financial leverage. (Remember: MM Theory assumes there is no bankruptcy cost)

A.$128,000

B.$4,000,000

C.$1,000,000

D.$1,600,000

E.$728,000