Consider two firms, firm U and firm L that are in the same industry and carry the same level of risk and both have EBIT of $750,000. Firm has no debt (is entirely equity) and has a cost of equity (rsU) of 14%. Firm L has $1.5 million in debt with a cost of debt (rd) of 8%.

a) Find V, S, rs, and WACC for firms U and L (without taxes) b) Now assume that both firms have a 25% tax rate. Find V, S, rs and WACC with taxes. c) Assume both firms are growing at a constant 7.75% and the investment in net operating assets required to support this growth is 10.25% of EBIT. Use the compressed adjusted present value (APV) model to estimate the following for both firm U and firm L: a. Firm Value b. Levered cost of equity c. WACC