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Assume that Firms U and L are in the same risk class and that both have EBIT = $500,000. Firm U uses no debt financing
Assume that Firms U and L are in the same risk class and that both have EBIT = $500,000. Firm U uses no debt financing , and its cost of equity is rsU = 14%. Firm L has $1 million of debt outstanding at a cost of rd = 8%. There are no taxes. Assume that the MM assumptions hold. 1) Find V, S, rS, and WACC for firms U and L. 2) Graph (a) the relationship between capital costs and leverage as measured by D/V and (b) the relationship between V and D.
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