In: Finance
MM with Corporate Taxes
Companies U and L are identical in every respect except that U...
MM with Corporate Taxes
Companies U and L are identical in every respect except that U
is unlevered while L has $14 million of 7% 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 $3 million. (4) The unlevered cost of equity is 12%.
- What value would MM now estimate for each firm? (Hint:
Use Proposition I.) 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
- What is rs for Firm U? Round your answer to one
decimal place.
%
What is rs for Firm L? Do not round intermediate
calculations. Round your answer to one decimal place.
%
- Find SL, and then show that SL + D =
VL results in the same value as obtained in Part a.
Enter your answers in millions. For example, an answer of $1.2
million should be entered as 1.2, not 1,200,000. Do not round
intermediate calculations. Round your answers to two decimal
places.
SL = $ million
SL + D = $ million
- What is the WACC for Firm U? Do not round intermediate
calculations. Round your answer to two decimal places.
%
What is the WACC for Firm L? Do not round intermediate
calculations. Round your answer to two decimal places.
%