Question 2 U Ltd. and L Ltd. are identical firms except that U Ltd. is ungeared while L Ltd. Has R20million of 8% bonds outstanding. Both firms have a tax rate of 50%, earnings before interest and tax of R5million, and the cost of equity capital for U Ltd. is 10% p.a. Assume that all of the MM assumptions are met. Required: a) Estimate the market values of both U Ltd and L Ltd. (10) b) If the market value of U Ltd. equals R20million and the market value of L Ltd. equals R40million, are the companies over or under valued? How will investors react to these values? (15)