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MM without Taxes Companies U and L are identical in every respect except that U is...

MM without Taxes

Companies U and L are identical in every respect except that U is unlevered while L has $7 million of 6% bonds outstanding. Assume that (1) there are no corporate or personal taxes, (2) all of the other MM assumptions are met, (3) EBIT is $3 million, and (4) the cost of equity to Company U is 12%.

  1. What value would MM estimate for each firm? Enter your answers in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to two decimal places.
    Company U $   million
    Company L $   million

  2. What is rs for Firm U? Round your answer to two decimal places.
    %

    What is rs for Firm L? Do not round intermediate calculations. Round your answer to two decimal places.
    %
  3. Find SL. Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000.
    $   million
  4. What is the WACC for Firm U? Round your answer to one decimal place.
    %

    What the WACC for Firm L? Round your answer to one decimal place.
    %
  5. Suppose VU = $20 million and VL = $22 million. According to MM, are these values consistent with equilibrium?
    -Select-Yes/No Item 8

Solutions

Expert Solution

jeff jeffy answered 7 months ago
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