Firm U and Firm L are identical in every respect except that U is unlevered while L has $10 million of 5% bonds outstanding. Assume that all of the MM assumptions are met, there are no corporate or personal taxes, EBIT is $2 million, and the cost of equity to Company U is 10%.

1. What value would MM estimate for each firm?
2. What is ksfor Firm U? For Firm L?
3. Find SL(the value of the equity for Firm L), then show thatSL+ D = VL= $20 million.
4. What is the WACC for Firm U? For Firm L?
5. Suppose VU= $20 million and VL= $22 million. According to MM, do these values represent an equilibrium? If not, briefly explain the process by which an equilibrium would be restored.