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 $$4$ 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$?$ Round your answer to one decimal place.

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What is $r_s$ for Firm L$?$ Do not round intermediate calculations. Round your answer to one decimal place.

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c$.$ Find $S_L,$ and then show that $SL+D=V_L$ 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=$$$,x_{\text{m}\text{i}\text{l}\text{l}\text{i}\text{o}\text{n}}$

$SL+D=$$$,Z_{\text{m}\text{i}\text{l}\text{l}\text{i}\text{o}\text{n}}$

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

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

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Please need remaining answers. Thank you!