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MM with Corporate Taxes Companies U and L are identical in every respect except that U is unlevered while L has $10 million of 6%

MM with Corporate Taxes

Companies U and L are identical in every respect except that U is unlevered while L has $10 million of 6% bonds outstanding. Assume that: (1) All of the MM assumptions are met. (2) Both firms are subject to a 40% federal-plus-state corporate tax rate. (3) EBIT is $3 million. (4) The unlevered cost of equity is 9%.

  1. 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: $ ?? million Company L: $ ?? million
  2. What is rs for Firm U? Round your answer to one decimal place. ?? % What is rs for Firm L? Do not round intermediate calculations. Round your answer to one decimal place. ?? %
  3. Find SL, and then show that SL + D = VL 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. SL = $ ?? million SL + D = $ ?? million
  4. 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. ?? %

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