MM with Corporate Taxes Companies U and L are identical in every respect except that U is unlevered while L has $18 million of 7% 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 10%.

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 10.55. Round your answers to two decimal places.

Company U:______ $ million

Company L: ______ $ million

b. What is rs for Firm U? Round your answer to one decimal place. Answer should be a percentage.

What is rs for Firm L? Do not round intermediate calculations. Round your answer to one decimal place. Answer should be a percentage.

c. 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

d. 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.

_______ %