Data for Firms

	Firm U	Firm L
Annual Exp. FCF	$5 M	$5 M
Cost of equity	15.0%	16.0%
MV (Debt)	$0	$15 M
Cost of debt	n.a.	12.0%
MV (Equity)	?	?
MV (Firm)	?	?
WACC	?	?

Facts:

Two firms (U and L)

Both risk equivalent

No taxes and perfect capital markets

Expected stream of earnings annually forever

All earnings paid out

Financed by debt (D) and/or equity (E), and total value (V) is D + E

Investment decisions known and fixed

QUESTIONS

1. What are the equity values of U and L?

2. What are the total firm values of U and L?

3. What are the weighted average costs of capital for U and L?