Schwartz Ltd and Wolfrum Ltd are identical in all aspects except their capital structures. Schwartz Ltd is 100% equity financed and has an after-tax unlevered cost of equity (k_u) of 20%. Its current before interest and after tax cash earnings (Xo) are $150,000, which are expected to grow at 3% per annum forever. Wolfrum Ltd has $300,000 of debt in its capital structure and expects to maintain this level of debt permanently. Assume the corporate tax rate for both companies is 30% and the cost of debt (k_d) is 7% p.a.

1. Now consider a Miller and Modigliani (MM) perfect capital markets with corporate taxes world:

(i) What is the value of the tax subsidy, and what is the value of Wolfrum Ltd?

2. What is the value of equity and the WACC for Wolfrum Ltd?