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Companies U and L are identical in every respect except that U is unlevered whole L has R10 million of 5% bonds outstanding. Assume that

Companies U and L are identical in every respect except that U is unlevered whole L has R10 million of 5% bonds outstanding.

Assume that (1) all of the MM assumptions are met, (2) both firms are subject to a 40% tax, (3) EBIT is R2 300 000,

and (4) the unlevered cost of equity is 11%.

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