MM with Corporate TaxesCompanies U and L are identical in every respect except that U is unlevered while L has $8 million of 5% bonds outstanding. Assume: (1) All of the MM assumptions are met. (2) Both firms are subject to a 25% federal-plus-state corporate tax rate. (3) EBIT is $4million. (4) The unlevered cost of equity is 12%.a. What value would MM now estimate for each firm? (Hint: Use Proposition 1.) 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.Company U: $Company L: $millionmillionb. 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 + DV₁ 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 twodecimal places.SL = $SL + D = $millionmilliond. 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.%

As per the MM approach proposition (with taxes), the value of the firm for unlevered firm and the…

MM with Corporate Taxes Companies U and L are identical in every respect except that U is unlevered while L has $8 million of 5% bonds outstanding. Assume: (1) All of the MM assumptions are met. (2) Both firms are subject to a 25% federal-plus-state corporate tax rate. (3) EBIT is $4 million. (4) The unlevered cost of equity is 12%. a. What value would MM now estimate for each firm? (Hint: Use Proposition 1.) 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. Company U: $ Company L: $ million million b. What is r, for Firm U? Round your answer to one decimal place. What is r, for Firm L? Do not round intermediate calculations. Round your answer to one decimal place. % c. Find SL, and then show that S₁ + D-V₁ results in the same value as obtained in Part a. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answers to two decimal places. SL-$ SL+D=$ million 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. %

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter17: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 7P