Question
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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