MM with Corporate Taxes

Companies U and L are identical in every respect except that U is unlevered while L has $8 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 $2 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. What is rsfor Firm L? Do not round intermediate calculations. Round your answer to one decimal place. % ???????

1. 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.
2. SL= $million ??????
3. SL+ D = $million ?????????
4. What is the WACC for Firm U? Do not round intermediate calculations. Round your answer to two decimal places. % ??
5. What is the WACC for Firm L? Do not round intermediate calculations. Round your answer to two decimal places. ??????%