Paragraph IS Styles 9. Companies U and L are identical in every respect except U is unlevered while L has $10 million of 5% bonds outstanding. Assume (1) that all the MM assumptions are met (2) both firms are subject to a 40% corporate tax rate (3) EBIT is $2 million (4) investors in both firms face a tax rate of Ta=28% on debt income and Ts=20% on average on stock income (5) the unleveraged cost of equity rau is 10% Answer: What is the value of the unleveraged firm Vu? (11) What is the value of the leveraged firm VL? (11) What is the gain in leverage? Calculation