The Kimberly Corporation is currently a zero growth firm with an expected EBIT of $100,000 and zero debt financing, and the cost of equity to an unleveled firm in the same risk class is 16.0 percent.

(a). No taxes are currently imposed on Kimberlys earnings. What is the value of the

firm (V_U )?

(b) Now, assume that Kimberly still pays no taxes but now decides to use $500,000

of 12.0 percent debt financing. Write down (do not calculate) the value of the

firm according to the MM specification and explain (in one, very short sentence)

why you can do so.

(c) At the level of debt in part (b) (i.e. $500,000), Kimberlys cost of levered

equity (R_E,L) = 32%.

(i) By considering the cash flow to equity investors in firm L, calculate the value of this

levered firms equity (E_L), and show that V_L = E_L + D.

(ii) Name (i.e., write down) the MM proposition that was used to calculate R_E,L.