Unlevered Corporation (Firm U) has a total market value of $500,000, a tax rate of 40 percent, and earnings before interest and taxes (EBIT) of $100,000. Levered Corporation (Firm L) is identical in all respects to Firm U, but Firm L has $200,000 market (and book) value of debt outstanding. Firm L pays total annual interest of $16,000 on this debt. Both firms satisfy the MM assumptions.

a. What is the value of Firm L according to MMs Proposition I with corporate taxes?

b. What is Firm Us cost of equity?

c. What is Firm Ls cost of equity? d. What is Firm Ls weighted average cost of capital