Company A and Company B are identical in every respect except that Company A is unlevered while Company B has $$100,000$ of $10\%$ bonds outstanding in perpetuity. Company A$$s cost of capital is $15\%$ and Company B$$s cost of equity is $18\%.$ EBIT for both companies is expected to remain at $$25,000$ forever. Assume all earnings are immediately paid out as dividends, investors are able to borrow at $10\%,$ and all the M&M assumptions are satisfied.

$1.$ What is the value of each firm?

$2.$ You own $10\%$ of Company B$$s equity. Use the M&M arbitrage argument to show the process and amount by which you could increase your wealth without changing your future annual cash flows.

$3.$ Show your cash flow before and after your transactions in part $2.$

For all remaining questions, assume the cost of equity for Company B was not provided.

$4.$ What is the value of each firm?

$5.$ What is the cost of equity for each firm?

$6.$ What is the WACC for each firm?

For all remaining questions, assume the companies are subject to a $40\%$ corporate tax rate.

$7.$ What is the value of each firm?

$8.$ What is the cost of equity for each firm?

$9.$ What is the WACC for each firm?

For all remaining questions, assume investors are subject to a $30\%$ tax rate on debt income and $22\%$ tax rate on equity income.

$10.$ What is the value of each firm?

$11.$ Compare the gains from leverage in parts $4,7,$ and $10.$

Answers:

Part $1$: VA$=$ $$166,666\mathrm{.}67$; VB $=$ $$183,333\mathrm{.}33$

Part $2$: $$1,666\mathrm{.}67$

Part $3$: CF Before $=$ $$1,500=$ CF After

Part $4$: VA $=$ $$166,666\mathrm{.}67=$ VB

Part $5$: REA$=15\%$; REB $=22\mathrm{.}50\%$

Part $6$: WACCA $=$ RAA $=$ REA $=15\%=$ WACCB $=$ RAB

Part $7$: VA $=$ $$100,000$; VB $=$ $$140,000$

Part $8$: REA $=$ RU $=15\%$; REB $=22\mathrm{.}5\%$

Part $9$: WACCA $=$ RAA $=$ REA $=$ RU $=15\%$; WACCB $=$ RAB $=10\mathrm{.}71\%$

Part $10$: VA $=$ $$78,000$; VB $=$ $$111,142\mathrm{.}86$

Part $11$:

Gain From Leverage With No Taxes $=$ $$0$

Gain From Leverage With Corporate Taxes $=$ $$40,000$

Gain From Leverage With Corporate and Personal Taxes $=$ $$33,142\mathrm{.}8$

Answers are all correct, please provide solutions to get these answers