MM with Corporate Taxes

Companies $U$ and $L$ are identical in every respect except that $U$ is unlevered while $L$ has $$14$ million of $8\%$ 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 $12\%.$

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 $10\mathrm{.}55.$ Round your answers to two decimal places.

Company U: $

million

Company L: $

million

b$.$ What is $r_s$ for Firm U$?$ For firm L$?$ Do not round intermediate calculations. Round your answers to one decimal place.

Firm U:

$\%$

Firm L:

$\%$

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 $10\mathrm{.}55.$ Do not round intermediate calculations. Round your answers to two decimal places.

$S_L=$$$,Q$ million

$S_L+D=$$$,Q_{\text{m}\text{i}\text{l}\text{l}\text{i}\text{o}\text{n}}$

d$.$ What is the WACC for Firm U$?$ For Firm L$?$ Do not round intermediate calculations. Round your answers to two decimal places.

Firm U:

$\%$

Firm L:

$\%$