Companies U and L are identical in every respect except that U is unlevered while L has $12 million of 5% bonds outstanding. Assume that: (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 $4 million. (4) The unlevered cost of equity is 12%.

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? Round your answer to one decimal place. %

What is rs for Firm L? Do not round intermediate calculations. Round your answer to one decimal place. %

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? Do not round intermediate calculations. Round your answer to two decimal places. % What is the WACC for Firm L? Do not round intermediate calculations. Round your answer to two decimal places. %