MM with Corporate Taxes

Companies U and L are identical in every respect except that U is unlevered while L has $16 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 $3 million. (4) The unlevered cost of equity is 12%.

1. What value would MM now estimate for each firm? (Hint:UseProposition I.) Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answers to two decimal places.
2. Company U:$million
3. Company L:$million
4. What is rsfor Firm U? Round your answer to one decimal place.
5. %
6. What is rsfor Firm L? Do not round intermediate calculations. Round your answer to one decimal place.
7. %
8. Find SL, and then show that SL+ D = VLresults 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.
9. SL= $million
10. SL+ D = $million
11. What is the WACC for Firm U? Do not round intermediate calculations. Round your answer to two decimal places.
12. %
13. What is the WACC for Firm L? Do not round intermediate calculations. Round your answer to two decimal places.
14. %