23 Jul WHAT IS THE VALUE OF THE UNLEVERED FIRM VU?
Companies U and L are identical in every respect except that U is unlevered while L has Show more Miller Model Companies U and L are identical in every respect except that U is unlevered while L has $10 million of 8% bonds outstanding. Both firms have an EBIT of $3 million. Assume that all of the MM assumptions are met. Suppose that both firms are subject to a 35% federal-plus-state corporate tax rate investors in both firms face a tax rate of Td = 28% on debt income and Ts = 20% (on average) on stock income and the appropriate required pre-personal-tax rate rsU is 10%.What is the value of the unlevered firm VU? Enter your answer in millions. For example an answer of $1.2 million should be entered as 1.2 not 1200000. Round your answer to two decimal places. 1. Suppose that both firms are subject to a 35% federal-plus-state corporate tax rate investors in both firms face a tax rate of Td = 28% on debt income and Ts = 20% (on average) on stock income and the appropriate required pre-personal-tax rate rsU is 10%. a. What is the value of the unlevered firm VU? b. What is the value of the levered firm VL? 2. Keep the other assumptions (D = $10 million rd = 8% EBIT = $3 million and rsU = 10%) but now suppose Td = Ts = 0 and Tc = 40%. a. What is the value of the unlevered firm VU? b. What is the value of the levered firm VL? 3. Keep the other assumptions (D = $10 million rd = 8% EBIT = $3 million and rsU = 10%) but now suppose that Td = 28% Ts = 28% and Tc = 40%. a. Now what is the value of the levered firm? b. What is the gain from leverage? Show less
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