Companies U and L are identical in every respect except that U is unlevered while L has $10 million of 7% bonds outstanding. Assume: (1) All of the MM assumptions are met. (2) Both firms are subject to a 25% federal-plus-state corporate tax rate. (3) EBIT is $4 million. (4) The unlevered cost of equity is 10%.

A.What value would MM now estimate for each firm? (Hint: Use Proposition I.) Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answers to two decimal places.

Company U: $ million

Company L: $ million

B. What is rs for Firm U? For firm L? Do not round intermediate calculations. Round your answers to one decimal place.

Firm U: %

Firm L: %

C. Find SL, and then show that SL + D = VL results in the same value as obtained in Part a. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answers to two decimal places.

SL = $ million

SL + D = $ million

D. What is the WACC for Firm U? For Firm L? Do not round intermediate calculations. Round your answers to two decimal places.

Firm U: %

Firm L: %

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