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

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Companies U and L are identical in every respect except that U is unlevered while L has $15 million of 5% 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 $2.5 million, and (4) the unlevered cost of equity is 12%.;a) What value would MM now estimate for each firm?;b) What is required rate of return for Firm U? For Firm L?;c) Find value of Equity for the levered firm and then show that SL + D = VL results in the same value as obtained in part a.;d) What is the WACC for Firm U? For Firm L?

 

Paper#26902 | Written in 18-Jul-2015

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