Question
Baker Corp. and Tucci Co. are identical in every respect except that Baker is unlevered and Tucci has $3.8 million of 5% bonds outstanding. Assume
Baker Corp. and Tucci Co. are identical in every respect except that Baker is unlevered and Tucci has $3.8 million of 5% bonds outstanding. Assume all of the following:
1) All of Modigliani and Miller's assumptions are met.
2) Both firms are subject to a 34% corporate tax rate.
3) EBIT is $2.0 million for both firms.
4) Investors in both firms face a tax rate (Td) of 34% on debt income and tax rate (Ts) of 8% on stock income.
5) The rate of return before personal taxes (rsU) is 14%.
Use Miller's model to fill in the table for Baker Corp. and Tucci Co.
Baker Co | Tucci Co. | |
Value of Firm | ||
Value of Stock | ||
Cost of Equity | ||
WACC |
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