Company U and L have the same business (operating) risk with EBIT of 50,000$ pa (perpetuity) but L is levered with 150,000$ of perpetual debt @ 4% interest rate. Us unlevered cost of equity is 8%. The market value of Ls equity is 3 00,000$. There are no taxes.

(2 marks) What is the levered cost of equity for L?

(4 marks) Assuming MM are correct, what should be Bs levered cost of equity?

(3 marks) Draw a graph of % return vs D/E ratio to illustrate your answers in (a) and (b).

(5 marks) Show how MM would make risk free profits.

(2 marks) What is the WACC, assuming MM are correct? Check your answer