SchwartzLtd and WolfrumLtd are identical in all aspects except their capital structures. SchwartzLtd is 100% equity financed and has an after-taxunlevered 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. WolfrumLtd 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.

Now consider a Miller and Modigliani (MM) perfect capital markets with corporate taxesworld:

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

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