24 Jul WHAT IS THE WACC FOR FIRM U?
Companies U and L are identical in every respect except that U Show more Problem 21-7 MM with Corporate Taxes Companies U and L are identical in every respect except that U is unlevered while L has $12 million of 6% bonds outstanding. Assume that (1) all of the MM assumptions are met (2) both firms are subject to a 40% federal-plus-state corporate tax rate (3) EBIT is $3 million and (4) the unlevered cost of equity is 12%. a. 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 1200000. Round your answers to two decimal places. Company U $ million Company L $ million b. 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. % C. 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 1200000. Do not round intermediate calculations. Round your answers to two decimal places. SL = $ million SL + D = $ million d.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. % Show less
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