Question
MM with Corporate Taxes Companies U and L are identical in every respect except that U is unlevered while L has $14 million of 7%
MM with Corporate Taxes
Companies U and L are identical in every respect except that U is unlevered while L has $14 million of 7% bonds outstanding. Assume that (1) all of the MM assumptions are met, (2) both firms are subject to a 35% federal-plus-state corporate tax rate, (3) EBIT is $2 million, and (4) the unlevered cost of equity is 10%.
What value would MM now estimate for each firm? (Hint: Use Proposition I.) Enter your answers in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to two decimal places.
Company U | $ million |
Company L | $ million |
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