MM with Corporate Taxes Companies U and L are identical in every respect except that U is unlevered while L has $16 million of 5% bonds outstanding

MM with Corporate Taxes

Companies U and L are identical in every respect except that U is unlevered while L has $16 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 $3 million. (4) The unlevered cost of equity is 12%.

1. 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.
2. Company U: $    million
3. Company L: $    million
4.  
5. What is rs for Firm U? Round your answer to one decimal place.
6.   %
7.  
8. What is rs for Firm L? Do not round intermediate calculations. Round your answer to one decimal place.
9.   %
10.  
11. 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 $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answers to two decimal places.
12. SL = $    million
13. SL + D = $    million
14.  
15. What is the WACC for Firm U? Do not round intermediate calculations. Round your answer to two decimal places.
16.   %
17. What is the WACC for Firm L? Do not round intermediate calculations. Round your answer to two decimal places.
18.   %