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MM without Taxes Companies U and L are identical in every respect except that U is unlevered while L has $10 million of 5% bonds

MM without Taxes

Companies U and L are identical in every respect except that U is unlevered while L has $10 million of 5% bonds outstanding. Assume that (1) there are no corporate or personal taxes, (2) all of the other MM assumptions are met, (3) EBIT is $3 million, and (4) the cost of equity to Company U is 12%.

A)

What value would MM estimate for each firm? Enter your answers in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to two decimal places.

Company U $ _____million

Company L $ _____million

B)

What is rs for Firm U? Round your answer to two decimal places.

____%

C)

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

_____%

D)

Find SL. Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000.

$____ million

E)

What is the WACC for Firm U? Round your answer to one decimal place.

______%

F)

What the WACC for Firm L? Round your answer to one decimal place.

______%

G)

Suppose VU = $20 million and VL = $22 million. According to MM, are these values consistent with equilibrium?

Yes or No?

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