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Companies U and L are identical in every respect except that U is unlevered while L...

Companies U and L are identical in every respect except that U is unlevered while L has $8 million of 5% bonds outstanding. Assume that: (1) All of the MM assumptions are met. (2) Both firms are subject to a 35% federal-plus-state corporate tax rate. (3) EBIT is $2 million. (4) The unlevered cost of equity is 10%. What value would MM now estimate for each firm? (Hint: Use Proposition I.) Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answers to two decimal places

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Expert Solution

1.
Unlevered value=2*(1-35%)/10%=13.0000 million

2.
Levered value=2*(1-35%)/10%+8*35%=15.8000 million

jeff jeffy answered 2 years ago
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