Question
Companies U and L are identical in every respect except that U is unlevered while L has: $10 million of 5% bonds outstanding. Assume that:
Companies U and L are identical in every respect except that U is unlevered while L has:
$10 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 $2 million.
(4) The unlevered cost of equity is 10%.
a. What value would MM now estimate for each firm? (Hint: Use Proposition I.)
b. What is rs for Firm U? For Firm L?
c. Find SL, and then show that SL D VL results in the same value as obtained in Part a.
d. What is the WACC for Firm U? For Firm L
Please how Excel syntax/formula for answer
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