Companies U and L are identical in every respect except that U is unlevered while L has $10 million of 5% bonds outstanding. Assume then 1.) all of the mm assumptions are met, 2.) both firms are subject to a 40% federal plus state corporate tax rate, 3.) EBIT is 2 million 4.) investors in both firms face a tax rate of Td= 28% on debt income and Ts = 20% on average on stock income, and 5.) the appropriate pre-personal tax rate rsu is 10%.

1. What is the value of Vu of the unlevered firm? (Note that Vu is now reduced by the personal tax on stock income so Vu= $12 million)

2. What is the Value of the Vl (levered firm)?

3. what is the gain from leverage in this situation?

4. Set Tc=Ts=Td=0 what is the value of the levered firm? The gain from leverage?

5. Now suppose Ts=Td=0 and Tc=40% What are the value of the levered firm and the gain from leverage?

6. assume that Td = 28%, Ts=28%, and Tc=40% Now what are the value of the levered firm and gain from leverage?