MM with Corporate Taxes Companies U and L are identical in every respect except that U is unlevered while L has $18 million of 5% bonds outstanding. Assume: (1) All of the MM assumptions are met. (2) Both firms are subject to a 25% federal-plus-state corporate tax rate. (3) EBIT is $5 million. (4) The unlevered cost of equity is 12%.

A) What value would MM now estimate for each firm? (Hint: Use Proposition I.) Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answers to two decimal places.

Company U: $__________ millio.

Company L: $___________ million

B) What is r_s for Firm U? Round your answer to one decimal place.

What is r_s for Firm L? Do not round intermediate calculations. Round your answer to one decimal place.

C) Find S_L, and then show that S_L + D = V_L results in the same value as obtained in Part a. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answers to two decimal places.

S_L = $_______ million

S_L + D = $_______ million

D) What is the WACC for Firm U? Do not round intermediate calculations. Round your answer to two decimal places.

%

What is the WACC for Firm L? Do not round intermediate calculations. Round your answer to two decimal places.

%