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problem: Consider the following information for an unlevered firm U:

EBIT = $1,600 annually

Unlevered value VU = $4,000

Tax rate = 34 percent

Cost of debt = 10 percent

A levered firm L in the same business risk class has a debt or equity ratio of 1.

Use the M&M Propositions to find out the

[A] After-tax cost of equity for firms U & L 

[B] After-tax WACC for both firms.

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M918981

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