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Companies U and L are identical in every respect except that U is unlevered while L has $175 million of 4.75 percent bonds outstanding. Assume
Companies U and L are identical in every respect except that U is unlevered while L has $175 million of 4.75 percent bonds outstanding. Assume (1) that all of the MM assumptions are met, (2) corporate taxes equal 25 percent, (3) that EBIT is $550,225,000, and (4) that the cost of equity to Company U is 10.5 percent. What value would MM estimate for each firm? What is rs for firm U? for firm L? Find Sl, and then show that Sl + D = Vl results in the same value as obtained above. What is ka for Firm U? for Firm L?
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