BONUS Question (12 marks)

State the three relationships (MM proposition I) between the levered firm (V_L) and the unlevered firm (V_u) for the three tax scenarios (no tax, corporate tax only, and then corporate and personal taxes). Define your variables and calculate V_L if EBIT is $10,000, coupon rate (and current yield) is 6% on perpetual debt of $40,000, the cost of unlevered equity is 10%, corporate tax is 30%, personal tax on equity income is 22%, and personal tax on debt income is 45%. Calculate the WACC for each tax scenario.